European Equity Recovery Helped By USD Selloff
New COVID-19 cases in Europe continue to grind higher, with France and the UK reporting a record number of new cases yesterday, while new cases in Germany touched the April highs. The recovery in European futures markets was helped by a sell-off in USD, though credit remains under pressure, This is partly a result of state guarantees rolling off, and will likely be a key driver in the coming months when coupled with USD price action.
Spinning Wheels Within Wheels
The spinning wheel within wheels can best explain the way we go out this week, with the tables turning in the past 24 hours. As Europe sells off and the US manages to trade up. That being said, cash credit painted a more negative but united front on both sides of the Atlantic. Spreads widened in Europe as Covid numbers increased further and spread widened as well in the US despite the latest headlines of a $2.4bn fiscal stimulus package.
Asia Trade
Asia initially followed Wall Streets close but quickly started focusing on their own good and bad. Chinese sovereign bonds won inclusion into a key index, spurring an early rally in the offshore yuan that later faded. China Evergrande bonds were halted after the world's most indebted developer warned it faces a potential default that could roil the nation's financial system if it doesn't get approval for a stock exchange listing. Stocks were therefore outperforming credit with IG 3-5bp widening and HY down as much as 2-3pts. European and US equity futures are both up 0.5% or so.
The US dollar took a bit of a pause in Asia, and equities have been relatively calm after getting knocked down this week. I would guess some would like to put this week in the bed after a bruising ride. Indeed, it has been tough riding the bucking bronco this week with the market momentum-shifting with lightning speed and often reversing on little more than a whim; it has been a week for the "nimble of foot" on the global trading floors, that's for sure.
Interesting Week
It's been an interesting week as we never did manage to get rid of the Monday blues sell-off syndrome. But will it be another case of "I don't like Mondays" next week with headlines around rising European COVID numbers, and the US stimulus package falls flat on the negotiating table? Or are we in for a fiscal surprise?
COVID-19's 2nd And 3rd Wave Propensity
The driver to the risk-off mood, which saw equities sharply lower this week, remains growing concerns about rising COVID-19 case counts and whether policymakers have ammunition to react.
In the US, this has centered on whether further fiscal stimulus might be forthcoming before the election. It seems the market is increasingly resigned to the idea that this is unlikely. So the latest shift on that narrative could deliver a fiscal policy surprise and would be a massive deal for risk markets, as its completely underpriced.
Fiscal Optimism
There has been some renewed optimism on signs that the Democratic House of Representatives leader Nancy Pelosi is considering passing another relief bill, having earlier not backed down from the $3.4 trn package that the House passed in May. House Democrats are reportedly working on a $2.4 trn proposal that could be sent to the House next week. President Trump has indicated he's only willing to go as high as $1.5 trn. However, the equity market declines on fading stimulus hopes could make the White House think again.
The importance of the US fiscal stimulus has cropped up repeatedly in conversations today in the context of supporting equity and energy markets and short USD strategies vs. EM FX into the US presidential election.
First Election Debate Looms Large
The problem with adding risk right, currency COVID haze notwithstanding, is that the near-term catalysts outlook brings the first Presidential debate and payrolls data in the US. If the polls tighten further, this could still drive risk premiums and the US dollar higher, and a miss in payrolls will also fuel the data deceleration narrative. With no support from monetary stimulus, it will leave the market with a limited policy cushion to buttress the likely fall in the S&P 500.
The US is six weeks past the expiration of expanded unemployment benefits and the initial PPP program. The election season in the US kicks into higher gear with the first Presidential debate on Tuesday—polls have tightened, but could there be more of a push, especially from President Trump, to take the stimulus deal over the line and help his election cause ?
Forex
Although the EUR/USD bounced back on improving global risk, it was USD strength rather than EUR weakness that explains much of the dip in EUR/USD with the EUR posting decent gains versus the high beta "risk-on" plays in G10 FX. But weak local data undermined Euro this week also. But the fact that the EUR held firm on the cross is a favorable sign.
AUD price action has been a touch more constructive, with risk sentiment appearing to stabilize a bit. Demand for AUD seemed to emerge ahead of the support for AUD/USD into 0.7005/15, as the broad ascent for USD showed signs of a stalling amid some consolidation.
USD/CNH spot dropped from 6.8250 to 6.8083 after the WGBI news, before better cross-CNH support afterward in the Asia session.
There was better USD/THB better buying on the break of 31.50, but then a sharp bounce-back of the top was likely driven by higher gold and onshore buying interest.THB should remain on the back foot and volatile in the short-term on various concerns, including anti-government protests and a pickup in new covid-19 cases in Europe, which will weigh on Thailand's tourism sector. Factors driving a stronger baht are fading: repatriation flows have been slowing, and with gold at current levels, onshore buying should push the USD/THB spot higher.
The Ringgit has been parked in neutral and weighted by political jockeying that sapped much of the local unit's energy this week. It was a horrible week for risk. And with the Ringgit having to juggle political and FTSE MGS bond inclusion issues, I think the market makes in KL are looking forward to an overflowing plate of Mee Goreng Mamak at their local eatery at the bell.
Gold Markets
The incessant gold selling is also taking a break today in line with the dollar pause. As it seems, with all the gold sell-off, regardless of what level we fall, weak hands ( fresh longs) sell to strong hands ( long term strategic buyers). The primary reason for this appeared to be profit-taking to cover equity losses. As the dollar goes, look for gold to follow closely.