With the pandemic firmly in everybody's life again and the major macro event of the year just weeks away from its final decision, markets will probably trend more volatile and tack in a defensive manner.
But it is not all about equities; there are lots of goodies to trade. Still, stock market investors have enough cash to put to work; and things will bounce back in a big way despite this week's teenage crush with a pre-election stimulus hurting the view. The short-term pump will unambiguously give way to post-election outcomes and optimism about fiscal spending potential in 2021.
A soft Thursday morning APAC session for equities should not detract from one of the more notable cross-asset takeaways this week as there are a plethora of cross-asset market bounces that ostensibly represent a reflationary dynamic independent of the risk on risk-off proclivities of global stock markets that tentatively remain anchored at significantly elevated levels where the air is thin.
The flow dynamics in stocks paint a pretty clear picture as folk are trying to take money off the table but cannot find liquidity, suggesting it is not the best of time amid a pre-election de-risking billow for Congress not to be topping up those stimulus high altitude air canisters.
Asia traded mixed, Hang Seng +0.09% as policymakers vowed to balance the need for stable economic growth and to prevent financial risks. Nikkei225 -0.7%. The yen jumped to a one-month high against the dollar on Wednesday, pressuring Japanese companies' shares that export autos and consumer goods.
Currency Markets
The dollar has been trading stronger today, which one could probably chalk it up to a detente in risk-taking vagaries. But I think this is more about traders taking a more in-depth look at the post-election playbooks where the path of least resistance for a weaker US dollar looks less cloggy on some currencies rather than others.
The market desperately wants to be short USD on a Blue Wave but has not acted full bore yet due to election uncertainty. The USD bear view's main driver is the US fiscal story, be it past, present, and future; more fiscal is terrible for the US dollar given the United States has the worst budgetary starting point in G-10 by a country mile.
Even with a 10-point Biden lead in the poll, speculative positioning is taking money off the table as mind games take over with risk around the election still significant. The outcome's timing is not precise.
Perceptions are scarred by 2016 when polls were wrong on Brexit and US President Trump, But The Blue Wave result has clear implications for a lower USD, and most believe it to be bullish stocks (spending outweighs tax. The market has bet on this outcome a bit but wants to bet much more.
But overall, after this week, we should finally see the conclusion of FX traders fighting the last battle over the inaccurate poll syndrome and the paths of least resistance opens up.
The Yuan
We have seen a little profit-taking on USD shorts and USD/CNH staying sticky ahead of 6.6250.
The Yuan is trading a bit softer as the street is getting a bit queasy that PBoC could introduce short term smoothing measures to tame the Yuan's rapid acceleration given the economic drag the rapidly appreciating Yuan could have on the recovering economy.
The Won
We saw our first verbal push back against currency strength in Asia today. USD/KRW opened at 1133.5 and traded down to 1132.3. Then, spot traded up to a high of 1138.5 following headlines that Korea authorities will act if it sees one-sided movement in FX markets. The pair has since retraced to 1135. I do not think there will be decisive intervention from authorities as long USDKRW moves broadly in line with its peers and is not the outlier by any means. There is more likely to be smoothing operations and more verbal intervention, however.
The Euro
This week the euro was undoubtedly not moving higher to the beat of the EU macro landscape or the ECB deflationary dovish lean I think the move is all about bond flows. Still, with nearly 40% of the ten-year issue taken up by central banks, this signals an unambiguous vote of confidence to the EUR as a reserve asset, particularly when the US dollar's exorbitant privilege is being questioned.
The Pound
With the EU economy struggling, I am struggling to figure out what possible short-term economic advantage the Brexit deal would have on the pound and send it towards 1.34. Especially after yesterday's Betty Grable, where a two big figure move seemed like thin air, still with some optimistic signs of a compromise being reached between the two sides, the street bias will be to buy on dips.
Oil Prices
Despite COVID rearing its ugly head, many Traders held on to a relatively constructive view on oil prices based on the China consumption picture complemented by the OPEC put and optimism over and the reflation impulse from the eventual US stimulus pump.
But prices tanked overnight as traders ignored the Hurricane Delta distorted data after inventories fell as the most devastating read for oil prices had to be that gasoline consumption is weakening. That view then fuses with the sum of all fears that COVID-19 is again starting to impact consumer behavior at the pump negatively. Mobility data had been holding up in the US, but this hard evidence paints an even uglier picture than expected, mostly when seen through the lens of growing Cushing warehouses.
Oil services firm Baker Hughes (NYSE:BKR) has reported a third consecutive quarterly loss and sounded a cautious note over continued demand recovery in the oil path. Chief executive Lorenzo Simonelli said that oil markets had "somewhat stabilized" in the wake of the crash, "demand recovery is beginning to level off, and significant excess capacity remains, which could create volatility in the future."
The potential for another sharp decline in oil has attracted a lot of attention recently, with a demand under pressure (from both the virus, lower air-fuel demand, and increased use of green technology) simultaneously as there are questions over whether Saudi Arabia wants to bring production under control.