Regardless of the slight pullback in the dollar, the backdrop for Asia FX currencies remains challenging into quarter-end. High-yielding currencies have broadly underperformed through the quarter, with IDR lagging. Very stable and low UST yields have pushed rates volume down to multi-year lows and should provide more risk-weighted incentives to buy assets in these currencies.
Improving US-led demand on fading COVID-19 concerns that could push oil prices higher would encourage MYR, upside. For now, greater sensitivity to China's supply-side driven recovery benefits North Asia (KRW, TWD)
The enduring sell-off in USD/CNH from late May faces two near-term challenges. First, China enters its Golden Week holiday period on Oct. 1 that could drive some profit-taking given the gnarly liquidity profile with no local support on offer.
The US election year in 2016 was the most obvious comparison when USD/CNH rallied to 6.81 from 6.70.
The second glaring risk is the first US presidential debate today. Prediction markets show that Joe Biden's lead over Trump has narrowed from +24 in late July to +10-6, depending on which cohorts you follow. A more convincing showing by the incumbent could drive concerns around negative US foreign policy implications for China. The Trump administration remains focused on technological decoupling from China, and on Friday, announced export restrictions to China's chip-making sector.
WM Fix
As I flagged earlier last week, US equity markets have significantly underperformed their G10 counterparts in September: SPX trailed SX53 and NKY by a wide margin. Consequently, the month-end indicators suggest that equity portfolio rebalancing should lead to USD buying into the month-end. I usually trade this signal via Cable because it has a relatively low liquidity profile relative to how much need to be bought or sold. It does not always work, but with the wild monthly swings on equities these months, it has been holding pretty consistent.
Did oil markets meet the stimulus sucker hole?
Did oil markets experience an episode of the proverbial stimulus "sucker hole" and let hope the fast and furious decline in oil prices this morning n? Oil prices don't take the rest of the market down the drain, especially with COVID resurgence filling the air? But it's pretty easy to pick on oil these days after all its unquestionably one of the least liked growth assets on the street. Any time COVID rears its ugly head, it signals a wave of selling
Still, its "Much more." That is a rough estimate of what Nancy Pelosi needs to hear from Steve Mnuchin if the White House wants to strike a deal with Democrats on another round of virus relief before the election; after all, the two protagonists are either mile apart or debating over nothing, depending on how you conceptualize a difference of $ .7 trillion in deficits and debt after House democrats unveiled a "new" $2.2 trillion proposal, as expected.
But bickering about the degree of lather, be it the keystroke $1.5 trillion or the voluminous pie in the sky 2.2 trillion. It is wildly bizarre when viewed through an MMT or even a moral lens. Come on, folks, just put a number out there and add to it when the next COVID storm clouds appear over the northern hemisphere. Congress needs to end the ongoing bipartisan political brinkmanship; otherwise, investors will turn ice cold well before the first polar vortex hits.
China going forward
Dual Circulation' was first mentioned at a meeting of the Chinese Communist Party's Politburo on May 14, chaired by President Xi. Since then, dual circulation has become a buzzword in China's economic policy circles and will be a theme to watch for as top officials meet next month to draft the country's 14th Five Year Plan for 2021-2025.
Defined as a policy that "takes the domestic market as the mainstay while letting internal and external markets boost each other," the dual circulation strategy aims to reduce China's dependence on overseas markets and technology in its long-term development. While the phrase may sound new, its underlying message of rebalancing the economy from an export-oriented and investment-driven one towards more focus on domestic demand is mostly a continuation of the government's stated goals over a decade ago.
China's consumer spending contributed 57.8% to GDP growth last year, compared to 35.3% in 2008, emphasizing the domestic market a natural choice, as the massive scale of China's consumer base and growing supply capacity mean colossal opportunity at home.
However, the Chinese leadership has, on many occasions, stressed that dual circulation is by no means a return to seclusion and has reaffirmed that opening up is a fundamental national policy.
Stocks
With the prevailing attitude in the market that stocks can not fly unless Banks take off, financials did not disappoint overnight, leaving a chorus of unsuspecting but welcoming investors agog as the S&P roared +1.6%, with bank stocks among the better performers. A similar theme in Europe, with a 2.2% rise in the STOXX 600, the most robust rise since Jun. 16, with financial stocks also underpinning that. US10Y yields unchanged at 0.65%. Oil and gold up.
Positive news around HSBC (NYSE:HSBC) and Evergrande (OTC:EGRNY) boosted sentiment with shares in both firms rallying. Indeed, this appears bouncy enough to offset Friday evening's announcement that the US is set to impose export restrictions on China's largest chipmaker, SMIC (HK:0981). The positive news in Asia has floated markets globally, leaving stock market investors jumping for joy as risk turns on in a risky world.
Currency Markets
US Dollar
A risk-on mood in global equities is echoed in some USD weakness, but the move's reach is still modest.
Traders now turn US, politics Opinion polls over the weekend (e.g., WaPo/ABC) continue to show Joe Biden leading President Trump by a margin of 6-10ppts depending on the cohort questioned.
Traders are also weighing some unflattering headlines for President Trump as news surfaced that he paid only USD $750 in income tax in 2016 and 2017. With the topic likely to feature in today's first US presidential debate, while not the nail in his re-election coffin, it could hurt his chances in a big way. Hence the Greenback has sold off on muscle memory that a Biden presidency will be bad for the dollar.
The Pound
GBP's surge seems at odds with the increasingly challenging COVID-19 picture as well as dovish rhetoric from the BoE. But this is all about into the tunnel we go.
Sterling pushed higher after London traders had a chance to chew on various reports over the weekend suggesting that following this week's Brexit negotiation round, there is the possibility of going into a 'tunnel' until the Oct. 15-16 EU Summit - diplomatic jargon for intense, secret talks to present a deal at the end of it. If the two sides were to announce such a 'tunnel' on Friday, that would be an incredibly positive sign.
The Euro
EUR/USD is higher this morning with "risk-on," but its gains may have been held back somewhat by ECB rhetoric. At a conference in Italy, the ECB's Ignazio Visco said, "the euro's recent strengthening is worrying us because it generates further downward pressures on prices at a time when inflation is already low."
The Malaysian Ringgit is trading stronger today, supported by a weaker improving global risk sentiment triggering a weaker US dollar. At the same time, higher oil prices round out the trifecta of bullish delights. Still, the bullish view is probably getting held back by yesterday's worse than expected trade numbers, the constant cloud of political uncertainly and possible market de grossing ahead of China Golden Week when liquidity typically dries up.
Gold
Gold appeared to put in a good a base around $1850 after a reasonably negative September, with the metal averaging a 1-2% move lower during the month in the past five years. It is now down almost 5% on the month, and at slightly more compelling levels to enter into longs given positions are much cleaner than even after last month sell-off.
Gold is up on a weaker US dollar, and more gains could be in the offing as focus shifts to US elections, political uncertainty, and geopolitical risks.
After being mercilessly hammered lower last week, gold found some decent traction, buoyed by the USD's retreat.
The bounce in risk appetite is a combination of banks higher and some optimism bout US fiscal stimulus, which is excellent for gold as it adds another layer debt on to the burgeoning US twin deficits.
There was a geopolitical component to gold's rally. Fighting erupted on Sunday between Armenian and Azerbaijani forces over the region of Nagorno-Karabakh.
Gold is especially sensitive to EURUSD movements. EURUSD rallied, but gains so far have limited by ECB rhetoric, which could cap golds recovery if the EURUSD stays below 1.1700