France Considers Une Nouveau Confinement Nationale | Daily Market Commentary with Jeffrey Halley
Speculation is mounting in France that the government is considering going all in and announcing a new one-month national lockdown to combat exploding numbers of Covid-19 cases. Previously, it had been thought that localised lockdowns, and extended curfews, would be France’s most likely course, a similar path taken by Italy, Spain and Belgium. President Macron will address the nation this evening and reveal the government’s decision.
If true, it would be very bad news for the European recovery, and for France itself, Europe’s second-largest economy. (stripping out the UK) The Euro will almost certainly come under more pressure, already on the back foot as investors reduce pre-US-election risk. The chill winds would be felt in European equities as well. The fall-out is unlikely to be confined to just Europe. I have stated before that double-dip lockdowns in advanced economies was a primary threat to the global recovery, torpedoing demand upon which the recovery in many developing markets is founded.
China alone will not be able to carry a sustained global recovery; the world needs at least the United States or Europe functioning as well. France is but one country, but if Europe’s second-largest economy goes down this route, it will be a precedent that other governments in Europe, struggling with a second wave, will feel more comfortable following. The consequences for European business and government finances will be dire, of course. Getting the national populations to follow it, given the lack of social discipline -and its consequences- displayed after the initial lockdowns ended, will be challenging indeed.
With the US elections less than a week away, the chances of a US stimulus deal pre-election now just above zero, and next-level confinements in Europe looming, the “blue wave” environment is getting cloudier. Despite a plethora of FAANGS releasing earnings tomorrow, it is hard to see this as an environment where equity markets will prosper. We still expect a retreat by asset market bulls as November 3rd inches closer. That should also see strength in the US Dollar and havens such as the Yen and Swiss Franc.
In Asia today, South Korea Consumer Confidence jumped to 91.6 from 79.4 in October. That follows an impressive Advance GDP yesterday and further reinforces that Northern Asia ex-Japan is recovering strongly on the coattails of China. Australia lifted itself out of deflation with the QoQ Q3 Inflation Rate reversing the previous quarters 1.90% fall, climbing 1.60% today. The RBA however, remained uber dovish, stating that they could ramp up bond-buying indefinitely. That may be the RBA’s preferred route ahead instead of another rate cut next week.
Malaysia’s Balance of Trade exploded higher to MYR 22 bio boosted by a 13.60% jump in exports. Malaysian markets are unlikely to gain much solace though as imports fell, reflecting a domestic economy in recession. Malaysia must also contend with political risk ahead of next week’s sitting of Parliament, and surging Covid-19 infections with regional restrictions back in place.
The offshore and onshore Chinese Yuan rates converged this morning after the PBOC tinkered with its daily USD/CNY fixing mechanism. The PBOC is allegedly asking rate submission banks for the fixing to suspend counter-cyclical factors (CCF) from submissions. With Yuan in a strengthening trend, that has the effect of weakening it slightly. It is not a back-door mechanism to weaker the Yuan generally I believe. It would work both ways if the Yuan were in a bearish trend. I suspect the PBOC has initiated another baby step in internationalising the Yuan.
Equity markets are mixed in Asia.
Asian equity markets have generally tracked lower today with US Index futures continuing lower in Asian hours, and the Nasdaq 100 futures notably, giving up some of yesterday’s gains. Overnight the Nasdaq outperformed, boosted by Microsoft’s results and tech sector M&A. the Nasdaq rose 0.76%, but the S&P 500 fell 0.17%, and the Dow Jones fell 0.80% as some legacy industries reported soft results.
In Asia, the Nikkei 225 has fallen 0.50% as the Yen continues to strengthen. In China, the Shanghai Composite has risen 0.15%, with the CSI 300 up 0.55%. Hong Kong has eased 0.40%, with Taiwan down 0.35%. Singapore has fallen 0.45%, and Malaysia has declined by 0.45%.
Australian markets are also in the green today. The ASX 200 is up 0.15% and the All Ordinaries up 0.40% after robust CPI data this morning and M&A speculation.
All in all, it is a non-descript day for Asia, having received a mixed lead from Wall Street overnight. However, with storm clouds gathering in Europe, and the impending US election, I believe that today’s session is merely a holding pattern, and that risk reduction is the path of least resistance for the remainder of this week, and into next week.
The Dollar climbs in Asia.
Currency markets consolidated overnight, but the US Dollar has resumed its climb in Asia, the dollar index rising 0.20% to 93.12 this morning. Covid-19 nerves ahead of Macron’s address today are weighing on the EUR/USD, which has fallen 020% to 1.1777. EUR/USD has fallen through support at 1.1800, and if France’s goes into national lockdown tomorrow, we expect EUR/USD to test 1.1700. It may also be enough to sway the ECB’s hand tomorrow and increase the pace of bond purchases, another negative.
Repatriation and haven buying continue to boost the Japanese Yen, which has fallen to 104.25 today, 75 points lower than the highs of yesterday. Monthly support looms at 104.00 and targets further losses to 103.00 if it gives way. We expect the Yen to outperform into next week’s elections.
The offshore and onshore Yuan’s have converged at 6.7110 today after the PBOC tweaked the Yuan fixing mechanism. US Dollar strength into the election should see the Yuan ease over the coming days. However, with such a massive yield advantage and sparkling economic data, we would expect Yuan’s advance to resume once the US elections are past. The Korean Won is a similar story and has retreated slightly today to 1130.70. The respite is likely to be short-lived with the Bank of Korea likely to intervene again on dips to 1125.00.
Across Asia, regional currencies have given ground versus the US Dollar today as well, as investors reduce risk into next week. Like the Yuan and Won, we expect regional Asia to continue outperforming once the elections have concluded. A possible double dip in Europe will be a story for later in November for Asia.
As the “blue wave” meets electoral uncertainty and pre-election nerves, we expect the US Dollar to outperform as risk is reduced into next week. Looking ahead though, no matter who wins the Presidency or the Senate, the US Dollar is likely headed into an extended period of weakness in 2021.
Zeta grants oil a temporary respite.
Oil prices rallied overnight as Hurricane Zeta headed towards the US Gulf oil production states. Zeta is not nearly as powerful as Epsilon before it, and production disruptions will be temporary. Brent crude spiked through $41.00 a barrel, but faded quickly, finishing only 0.60% higher at $40.70 a barrel. Similarly, WTI spiked higher, but failed ahead of $40.00 a barrel, finishing the day 1.0% higher at $39.00 a barrel.
Asia has quickly unwound the temporary Zeta-spike today, Brent fading 0.30% to $40.55 a barrel, and WTI easing 0.45% to $38.75 a barrel. The rise in US API Crude Inventories to 4.6 million barrels has not gone unnoticed by Asia, and Covid-19 rampage across Europe and the US is a material threat to the demand side of oils equation.
Brent failed to hold above its 200-day moving average (DMA) at $41.00 overnight, and this becomes initial resistance, followed by $41.50 a barrel, the overnight high and previous multi-day lows. Support lies at $41.25 a barrel, with a failure opening deeper losses to $39.00 a barrel.
WTI has resistance at the previous week’s lows, and the overnight highs, around $39.75 a barrel. After that, the 50 and 100-DMA’s at $40.20 and $40.30 a barrel present formidable resistance. Monday’s low at $38.30 is initial support, followed by the 200-DMA at $37.35 a barrel.
Whichever way you cut it; it is hard to construct a bullish case for oil at the moment. Once the Zeta premium has passed, oil is likely to continue to supply, and this week, rallies are likely to be there to sell.
Gold’s range continues to compress.
The range compression continues in gold, with gold trading in a $1898.00 to $1910.00 an ounce range overnight. That leaves gold tucked up still in an ever-narrowing symmetrical triangle that suggests a very large breakout is about to occur, possibly targetting a $100 an ounce move.
Gold is almost unchanged at $1908.00 an ounce in moribund Asian trading. With the Covid-19 risks increasing by the day, notably in Europe, and unwinding of pre-election bullish trades in other markets, the odds favour a break higher. The view is though that pre-election risk hedging will benefit gold.
The boundaries of the triangle are at $1899.00 and $1922.50 an ounce today. A concerted daily close above or below those points signalling the long-awaited breakout is upon us. The 100-DMA at $1887.00 an ounce will provide interim support. Like a first Tinder date, I remain nervously bullish, while simultaneously preparing to have my heart broken.