Head of FX Strategy
Summary: Market sentiment weakened yesterday ahead of key earnings reports from a handful of the largest US equity giants on Thursday, and after German SAP suffered one of its worst days ever with a drop of 20 percent, collapsing the DAX close to its 200-day moving average. It seems that pre-election US stimulus hopes are fading fast and the drumbeat of Covid-19 news in the US and Europe is also weighing on sentiment.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - ongoing concerns on the status of stimulus talks in the US and perhaps concerns over the implications of a strong Democratic result and clean sweep of the Senate and House for the party saw key pivot levels breaking down yesterday in the major US indices, though there was a considerable bounce-back later in the session that prevented the day from turning into a rout. The pivotal area in the Nasdaq 100 remains the 11,500-600 zone after that index traded briefly below 11,400 yesterday, and similarly, the 3,400 area in the S&P500 is the tactical bull-bear line.
EURUSD – the EURUSD supermajor is stuck in a rut and we like approaching trading the pair via options over the US election outcome, as implied volatilities are relatively cheap, given the magnitude of the possible reaction to the US election outcome: just for perspective, and not a recommendation, a one-month 1.2000 call options costs 55 pips while a 1-month 1.1600 put costs 31 pips as of this morning with EURUSD trading 1.1834. Those 1.1600 and 1.2000 levels are the approximate extent of the current range established since July.
EURGBP and GBPUSD – Brexit negotiations have been extended at least through tomorrow after they were scheduled to wrap up at the weekend. The two sides are engaged in an “intensive phase” of talks. This week should give an impression of whether the two sides are moving closer to agreement, and also perhaps the outlines of the agreement’s terms. The consensus is that a negotiation breakthrough and clear path to a deal will unleash a sterling rally, but we have residual concerns that the Covid-19 impact and weak structural outlook for sterling could mean a very low ceiling for any rally and even an eventual sell-off for the currency.
The US Yield curve (10YUSTNOTEDEC20 and 30YUSTBONDDEC20) continue to flatten amid surge in coronavirus cases and proximity to US election – The US Yield curve continue to flatten as coronavirus cases hit a new record. The administration admitted that at this point it does not have control over the pandemic and it trying to accelerate the coming of a vaccine. We might see more flattening going into the election as coronavirus cases rise and capital seek safety amid uncertainty.
Gold (XAUUSD) remains stuck inside its established $1885 to $1930 range as the market continues to struggle for direction. Yesterday the metal found some support as the resurgent virus drove bond yields and stocks lower while the VIX surged by the most in seven weeks. Stimulus pessimism and a stronger dollar, however prevented the metal from challenging resistance. More of the same is likely to unfold ahead of Tuesday’s U.S. election where Biden’s lead in the polls are narrowing. The surprise Trump win in 2016 helped trigger a 15% sell-off, so no wonder that investment decisions are on hold until after Tuesday.
Brent crude oil (OILUKDEC20) and WTI crude oil (OILUSDEC20) trade higher after recovering from yesterday’s weakness. Worries about fuel demand in the U.S. and Europe on surging virus cases are being somewhat offset by robust demand from Asia. Libyan production meanwhile continues to recover from less than 100k barrels/day recently to potentially reaching 1 million within weeks. While it is unlikely that crude oil will experience another April-styled rout, an improved outlook is unlikely to emerge before a vaccine can be distributed. For now, Brent remains stuck in a $39 to $44 range with the market focusing on the potential impact of Hurricane Zeta, the 11th record storm to hit the U.S. this year.
Turkey government bonds and ETF fall sharply as Turkey-France tension escalates (ITKY:xmil). Geopolitical tensions are rising as Macron criticizes Muslim extremists, and Turkey’s Erdogan calls for a boycott of French products. Consequently, Turkish asset as suffering with the iShares MSCI Turkey 5% lower from the closing of Friday last week and price of the USD Turkish bonds with maturity March 2027 (US900123CL22) quoting two points lower and offering a yield of 6.7%.
What is going on?
UK Tory MP’s rebel against Boris Johnson’s lockdown policy for northern Britain - a group of more than 50 Conservative MP’s are demanding to know the path out of lockdown measures imposed for portions of northern Britain, claiming it was unfair for the regional lockdowns in inflict disproportionate damage on these regions, which were key in handing the most recent national election to the Conservative party.
US Supreme Court Nominee Amy Coney Barrett was confirmed. This sets up a strong conservative majority on the Supreme Court and could seeing key US legislation revisited – everything from the ACA, or “Obamacare” to even legislation linked to abortion rights, moves that could see a possible Democrat-led Congress to “pack the court” with new justices and lead to a deepening partisan divide in the US.
Early voting in the US is breaking records. With not all of yesterday’s numbers yet tallied, nearly 65 million Americans have already voted in the 2020 election, nearly half of the total that voted in 2016. The irony of the early voting situation is two-fold, as states that are accustomed to dealing with early votes and counting them before Election Day (battleground state Florida in particular) may be quick to publish results that show a strong Democratic initial lead, while states that are slow to count mail-in ballots could show the opposite.
What we are watching next?
Ant Group IPO, the “Amazon of money” – set for November 5 in Shanghai and Hong Kong. Jack Ma’s fintech giant that runs the Alipay platform is set to raise about $34.5 billion, a listing that will be the biggest IPO ever. At a market value of around $315 billion it will rank next to JPMorgan Chase & Co. It has already created a frenzy among investors desperate to get a slice with Hong Kong stockbrokers offering as much as 20 times leverage to retail investors. Alibaba will hold around 32% of Ant shares after the IPO.
US stimulus package status? The news from yesterday’s call between House Democrat Pelosi and Trump administration representatives are that they were unable to agree as the clock winds down into Election Day just a week away now. The latest catch is the “language” on a national health testing and tracing programme for the Covid-19 outbreak. The two sides consistently crank out optimistic sounding language, but the market wants a deal.
ECB meeting this Thursday - the market is looking for a major new QE expansion from the ECB, at either this week’s meeting or in December, with the mounting toll from Covid-19 perhaps tilting the odds more in favour a move now rather than a wait until December, although the latter could be more likely because of dissenting voices on the Governing Council and as the December meeting will be accompanied with the latest economic projections. Hard to tell whether the ECB can really move the needle, as the policy ball is in the EU’s court, as fiscal stimulus is far more powerful.
US Q3 earnings season continues and picks up this week. This is the most important earnings week which will provide clarity on where global corporate earnings were in Q3. So far, the numbers suggest S&P 500 earnings are up 21% q/q, which is still below the consensus going into the Q3 earnings season, but we expect that by the end of the week S&P 500 earnings will be above consensus due to technology and health care stocks. The list below shows the 30 largest companies reporting this week.
Economic Calendar Highlights for today (times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
