Sell, Mortimer! Sell! | Daily Market Commentary with Jeffrey Halley
The blue wave trade became Moody Blue overnight, as buy everything turned into sell everything. Although Asian markets wobbled yesterday, it was Europe that led the rout as France and Germany enacted national lockdowns lite in an attempt to control their exploding Covid-19 cases. European equities headed South and Wall Street was all too happy to join in with Covid-19 cases ramping up in the US and any hope of a US stimulus package in November (it was previously pre-election), left blowing in the wind. The belated realisation that the US Senate race is the real election race next week is likely to dampen any comeback enthusiasm, with nine states too close to call and the Supreme Court waiting to adjudicate results.
France and Germany’s national lockdowns are quite a bit different this time. The emphasis is on preventing citizens from meeting in large groups and socialising, while attempting to keep schools and business’ open. That is somewhat ironic, as the lack of social discipline and allowing Europe to enjoy summer holidays and partying has played no small in getting them back into this mess. The compromise solution hints of desperation at preventing the dreaded double-dip recession. (the Spanish Flu pandemic featured three total lockdowns I believe) I wish them well in its success, but I will not be at all surprised if it doesn’t. With much of the rest of Europe and the UK heading in the same direction, I expect the Euro, Sterling and Eurozone equities to be unloved for the next month at least.
The US Dollar was the big winner overnight, as dollar-bloc currencies were bashed. The Australian, Canadian and New Zealand Dollars coming in for particular attention. Oil gushed lower as equity markets fell over, and gold and Silver could not escape their high correlation to large equity sell-offs.
Fellow haven currency, the Japanese Yen also continued rallying overnight ahead of the Bank of Japan’s meeting today. Retail sales today disappointed, falling 8.70% YoY for September and shrinking by 0.10% MoM, highlighting the asthmatic recovery of Japan’s domestic economy. There is an outside chance that the BoJ will increase quantitative easing in response to a soggy domestic economy. However, after years of much of the same and still no inflation in sight, the most likely outcome will be unchanged but watching closely. It is a metaphor for the past 30 years and a salutary lesson of why central banks are more scared of deflation than inflation. Like the virus, it’s hard to get out once it settles into the population. The Yen should benefit, and assuming the world is still screaming sell Mortimer for the rest of the week, which I expect, USD/JPY should test 104.00 and extend to 103.00 into the US election.
Asia, as is it’s want of late, has been relatively stable this morning. Asian currencies held their own overnight, and equity markets, for the most part, have only edged modestly lower today. US equity index futures have rallied by around 1.0% today, likely driven by profit-taking from overnight shorts. That has supported regional markets which continue to benefit from the anchor provided by China, both on the economic data and currency front. Reuters is reporting that Joe Biden will “consult allies” on future China tariffs if elected. That story seems to be supporting Asian markets with China actually moving into positive territory.
The price action in Shanghai suggests that all of Biden’s allies will tell him to get rid of Chinese tariffs. The keyword is “consult,” which doesn’t it will follow a path of action. And we still may have a Republican Senate and or contested election results at that level to contend with. Still, the story does appear to have put a floor under negative sentiment in Asia for now.
Later today, we have the ECB meeting, US GDP and Facebook, Alphabet, Apple, Amazon and Twitter reporting quarterly results. The ECB is 50/50 I believe in increasing bond purchases, preferring to wait until December and better visibility on the fallout from Europe’s lockdowns, as well as Brexit. The December meeting will definitely be a “live” one though.
US GDP will rebound by over 30% for Q3, unwinding all the losses of the lockdown wracked Q2. Unless it surprises at 35%-plus, I doubt it will be enough to move the sentiment needle materially. Further gains from here will be much harder to grasp. The same is true for the FAAAT’s where I expect all except Twitter to produce sparkling results. Timing is everything, and risk sentiment will speak louder than profits this week.
The famous catchphrase from the movie Trading Places will I believe, continue to dominate trading into the US election next week. Mortimer will keep selling like its 1983 (when regulators wore brown suits, did lunch, but not much else. Simple times). Election uncertainty and Covid-19 is belatedly being priced into markets and is a toxic mix. Any stimulus or political headlines are likely only to provide rallies to sell into.
To quote the King….
“Oh, Moody blue
Tell me am I gettin’ through
I keep hangin’ on, try to learn the song
But I never do”
Thank you very much, uh-huh.
Equity markets are resilient in Asia.
Led by Europe, Wall Street was crushed overnight by US election and Covid-19 fears, eroding the blue wave positioning prevalent in markets in recent weeks. The S&P 500 fell 3.10%, the Nasdaq fell 3.20%, and the Dow Jones fell by 3.42%.
However, the news has not been entirely grim, with the aftermarket futures on all three indices over 1.0% higher in Asia. Short-term profit-taking from the overnight session, and the Biden consultation story regarding Chinese tariffs, have stopped the rot and helped Asian stock markets to weather the overnight storm.
The Nikkei 225 is down only 0.40%, although the more volatile South Korean Kospi has fallen 1.65%. In China, both the Shanghai Composite and CSI 300 have actually reversed initial losses and have climbed into positive territory. Reuters Biden/China story appears to be behind the upside reversal, the Shanghai Composite and CSI 300 now 0.10% higher on the day.
Regionally though, Hong Kong remains down 1.10%, with Singapore down 0.80%, Thailand down 0.80% and Taiwan down 1.10%. Indonesia and Malaysia, along with most of the Middle East, are closed for a holiday today. Australian markets, with their high beta to Wall Street, are the regional worst performers, the ASX 200 and All ordinaries are 1.80% lower.
The dollar-bloc Australasian markets remain the most vulnerable to more downside, with China anchoring regional Asian markets. That said, the storm clouds across Europe and the US are likely to thicken over the coming days, meaning any rallies are likely to be short-term. Asian markets should outperform but will not escape the dark embrace of US and European turmoil entirely.
Haven buying propels the US Dollar higher.
The greenback enjoyed a robust overnight session as investors rotated out of G-10 currencies and into Dollar and Yen haven positioning. The dollar index rose through its 50-day moving average (DMA), finishing 0.50% higher at 93.50. It may well test monthly resistance at 94.00 into the end of the week.
EUR/USD fell 0.40% to 1.1750 with significant support nearby at 1.1700. A failure would target further losses to 1.1700. The dollar-bloc currencies came in for particular attention. The AUD/USD fell 1.15% to 0.7046, retreating through its 100-DMA at 0.7115. The 0.7000 region is critical support now. The NZD/USD fell 1.05% to 0.6735 with the 100-DMA at 0.6600 its next important support. USD/CAD rose 1.05% to 1.3320, just shy of its 100-DMA at 1.3335. An under-dovish Bank of Canada in a firm “lower for longer” mode did not help the Loonie, with USD/CAD targeting monthly resistance at 1.3420.
Asian currencies fared much better. Although regional currencies edged lower versus the greenback, the risk-reduction selling was clearly more prevalent amongst the G-10 grouping. The PBOC fixing for USD/CNY was slightly higher today at 6.7260, but overall, a firm CNY continues to be a solid anchor for other Asian currencies. I continue to expect Asian currencies to outperform G-10 currencies over the next week and possibly longer, depending on how chaotic the US election result is.
The US Dollar has edged lower in Asia, as US equity index futures have rallied in Asia, limiting the stock-market fallout in the region. The Biden/tariff story from Reuters has also added a measure of support to battered G-10 currencies. It is likely to be a temporary respite though, with further “blue wave” unwinding to come ahead of November 3rd, haven currencies such as the US Dollar will continue to outperform.
Covid-19 torpedoes oil prices.
The new lockdowns in German and France and the spiralling case numbers of Covid-19 cases in the US, torpedoed oil prices below the waterline overnight. Concerns about the consumption outlook, and an unexpected jump in official US crude inventories saw Brent crude fall 4.15% to $39.00 a barrel. WTI fell by 4.10% to $37.35 a barrel.
The stabilisation of equity markets in Asia has provided a brief respite for oil today, both contracts edging 15 cents higher this morning. The consumption risks in Europe especially, and the technical picture on both contracts, makes for grim reading today still.
Brent crude failed to recapture its 200-DMA at $40.90 a barrel overnight and now sits just above monthly support between $38.75 and $39.00 a barrel. Further losses to $37.00 a barrel beckon if that support zone fails.
WTI has resistance at its overnight high of $39.00 a barrel but sits just above its 200-DMA at $37.25 a barrel today. Minor support is at $36.70 and $36.15 a barrel. After which, the charts show nothing but clear air until $34.00 a barrel.
From here, oil needs some good news in the form of a US stimulus breakthrough, or some verbal support from OPEC+ to stop the rot. The picture is clouded by the impending 2 million barrels per day production increases by OPEC+ scheduled for January. OPEC+ is likely though, to try and ride out the US Election storm, with only a fall by Brent crude through $35.00 a barrel likely to elicit an early response. For now, oil markets look like sells on rallies.
Gold and Silver fail to shake off the stock-market correlation.
They say, “this time it’s different,” but bitter experience teaches that it rarely is. Such was the case for precious metals overnight, with the equity market correlation back in full force. As equity markets headed South quickly, strong selling emerged in Gold and Silver. Gold finishing 1.60% lower at $1877.25 an ounce, with Silver falling over 4.0% to 23.3800 an ounce.
The fall may be attributed as much to the market being long already, in anticipation of further safe haven buying, as to the equity market fall. Nevertheless, the fact remains that precious metals cannot shake off the correlation when the sell flag gets hoisted over stock markets. Gold has broken out of its symmetrical triangle to the downside, with the same pattern repeated on Silver.
Gold has also fallen through its 100-DMA at $1888.00 an ounce, another bearish indicator. The triangle suggests that gold could fall as far at $1800.00 an ounce with interim support at $1850.00 an ounce. Resistance being the 100-DMA and the base of the triangle at $1903.00 an ounce.
Gold has risen a modest 0.30% to $1883.00 an ounce in Asia as stock markets have stabilised, but the rally looks fragile. Like oil, gold likely needs some good news on the US stimulus front lifting equities to stop the rot, with the market still looking long and wrong. Gold watchers should perhaps take their cues from Silver, whose breakout lower is much more apparent.
Off course, readers yesterday, who took my bullish outlook yesterday as a reverse leading indicator signal (and I don’t blame you), likely enjoyed a pleasing night. The pleasure was all mine, I’m glad I was of help!