Market Quick Take - November 5, 2020

Macro 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  The US Presidential Election results are being heavily contested by President Trump, who is demanding a recount in Wisconsin and accusing the Democrats of fraudulent vote counts as it appears Joe Biden likely has the votes to send him over the top. Biden has declared himself the likely winner. In markets, US equities ripped higher, and US yields collapsed at the long end of the curve.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) US equity markets saw one of their strongest days in months, with the S&P 500 up a stunning 6.6% and futures tacking on further gains overnight. The Nasdaq 100 was up nearly 4.5%. Even if we have a contested US election scenario, the market has either assessed that the margin of Biden’s win is likely to see the Democrats prevail with little disruption, while another contributor to the upside is possibly that the Democrats not taking the Senate removes the threat of any change to US corporate taxes for at least two more years. Technically, the collapse in volatility suggests the market had perhaps over-hedged the election risk and the rally should perhaps be seen in light of a huge lifting of hedges rather than as a strong new surge of optimism.

EURUSD – the US dollar nudged back to the weak side, likely on the complete collapse in equity market and bond market volatility hedges, more than due to any slicing and dicing of longer-term post-US Election scenario narratives. This leaves EURUSD back in the limbo between the critical downside trigger zone near 1.1600 and the upside range high from October of 1.1900 ahead of today’s FOMC meeting.

USDJPY – the combination of a Biden presidency with Republican control of the Senate is the outcome that was always seen as the least likely to provide the least amount of fiscal stimulus as the Republican Senate will likely block almost anything the Democrats come up with in the coming two years at least until the 2022 mid-terms. This could take considerable air out of the “reflation trade” and see US yield curve steepening expectations frustrated for a time – a supportive environment for the JPY as we now watch whether the market picks up this theme and takes USDJPY below 104.00.

Gold (XAUUSD) trades back above $1900/oz while Silver (XAGUSD) has reigned back what was lost in the early hours of the U.S. election night. A Biden win with a Republican controlled Senate is likely to deflate the reflation focus but that could be offset by the volatile political outlook that now awaits in Washington. For now, the directional input continues to be provided by the dollar which yesterday fell as stocks rallied and volatility collapsed. Gold needs to break the sequence of lower highs seen since the August in order to attract renewed interest. With that in mind the first major level can be found at $1931 with support being the election night low at $1883/oz.

Brent crude (OILUKJAN21) and WTI crude oil (OILUSDEC20) rallied strongly on Wednesday, supported by an 8-million-barrel stock drop, surging risk appetite and a weaker dollar. However, with Biden on the brink of a narrow win, a continued surge in Covid-19 cases in Europe and the U.S. and rising production from Libya, the recovery stalled overnight with focus returning to what support OPEC+ can give at a time of weakening fundamentals. A delay to the January hike increasingly looks like a bare minimum. We suspect that Brent for now will remain within the near seven-dollar down trending channel, currently providing resistance at $42/b.

U.S. yield curve flattening can quickly reverse as we get a clear winner (10YUSTNOTEDEC20, 30YUSTBONDDEC20). The rally in Treasuries will most likely be short lived. Yesterday, the Treasury said that it will issue $122 bn in next week’s quarterly refunding auction. This is the third quarter in a row that it is planning to issue record high volume of bonds. At the same time, instead of unwinding future bond positions as Treasury yields were falling yesterday, investors increased their short bets. This can only translate in a fast steepening of the yield curve. The Federal Reserve will speak today but we don't expect it to add stimulus for the time being due to the rally in Treasuries.

Flight to safety benefits sovereigns that will gain the most by more accommodative central banks policies (10YBTPDEC20, GILTLONGDEC20). As the result of the U.S. election was less and less clear, investors sought safety in Treasuries as well as sovereign European bonds. The biggest gainers were the sovereigns that will most likely benefit from more central banks accommodative policies such as 10-year Gilts, which yields fell 6bps on the day of yesterday and Italian 10-year BTPs which yields fell more than 4bps.

AstraZeneca (AZN:xlon) - core Q3 EPS $0.94 vs est. $1 and Q3 revenue is $6.58bn vs est. $6.65bn. The lower than expected profit in Q3 was due to higher operating costs including R&D expenses rising rapidly, but lower fewer doctors’ visits reducing demand a bit. The European pharmaceutical company sounds optimistic on the Covid-19 vaccine which it develops in collaboration with the University of Oxford.

Nintendo (7974:xtks) - shares were up 2% today on higher unit forecast for its Switch console now seeing 24mn vs previously 19mn underscoring the high demand for gaming. Q2 Switch revenue was up 43% y/y. The gaming company is lifting its FY guidance on net income to JPY 300bn from previously 200bn.

What is going on?

US Election result still being tallied - Biden the likely winner for President: with virtually all results in from the voter count in Wisconsin and Michigan, Biden has won those two states, if only by a 30k margin in Wisconsin, where President Trump is demanding a recount. The Pennsylvania count of mail-in votes is clearly progressing in Biden’s favour and is virtually guaranteed to send him over the top once the final hundreds of thousands of mail-in votes are tallied. Trump is accusing the Democrats of fraud, but even without Pennsylvania, Biden can secure a victory if Nevada remains in his column (or if Georgia’s final vote count sees Biden edge out Trump – lower odds there).

US Senate Leader McConnell says US should pass limited stimulus bill this year, and seems willing to increase aid for schools, hospitals and small businesses, though he remains against the larger Democratic bill that would include aid for local governments, funding for a national coronavirus testing strategy and a removal of the cap that Trump’s tax reform place on deductions for local and state taxes (always designed to punish Democratic strongholds with higher local tax rates like New York and California). The US Senate is seen almost certain to remain in Republican hands, even if the result is not yet official.

Bank of England made its decision early this morning and announced a £150 billion increase in its QE purchases in a meeting decision that was move to early this morning, which helps support the recent new fiscal outlays UK Chancellor Sunak announced recently to counter the risks to the economy from the fresh Covid-19 lockdowns. The move was at the high end of consensus, but sterling seems to be absorbing the news well this morning.

The UN FAO will release its Global Food Price Index for October today at 9:00 GMT. It will have risen for a fifth consecutive month after the Bloomberg Agriculture Index, driven by the grains sector, rose by almost 4% last month. Strong Chinese soybeans demand for fear of shortages has driven domestic prices to a record high. In Chicago the price is trading at a four-year high with dry weather in South America an additional worry the market has to deal with.

Implied equity volatility is collapsing. The VIX is below 30 and the forward curve is moving down in a sign that investors readjusting their tail-risk hedges as markets have a bit more clarity on the direction from here. While still a potential contested US election there seems to be a path that leads to a Biden victory but with a split senate leading to no major reform agenda in the US and thus lower policy uncertainty.

What we are watching next?

How long will election uncertainty stretch?  Some US states have not yet been declared, as full vote counts are not yet available. The last state with sufficiently large uncounted votes remaining for the result to change are Pennsylvania, Nevada, and possibly Georgia. If Biden wins any of those three, the election is theoretically settled, provided Republican claims that Arizona is still in play prove unfounded. The total popular vote count nationally has moved more than 3.5 million votes in Biden’s favour and that lead will expand considerably when the final tally is done. Trump’s team is accusing Democrats of stealing the election outright.

Q3 earnings season continues this week with more focus on Europe. As we highlighted yesterday the most interesting earnings release to watch was going to be MercadoLibre, the equivalent of Amazon.com in South America, and the online retailer did not disappoint. Q3 revenue was $1.12bn vs est. $979.4mn and EPS was $0.28 vs est. $0.27. The company says that demand remains high despite reopening of several countries in South America. Shares were 7% higher during yesterday’s session. With more earnings releases published Q3 EPS in S&P 500 is now up 42% q/q which is significantly better than expected. Today the market will focus on earnings from Square, Uber, Alibaba and Regeneron.

  • Today: AstraZeneca, Zoetis, Daikin Industries, Nintendo, Linde, Cigna, Duke Energy, Booking Holdings, T-Mobile US, Enel, Square, Uber Technologies, Alibaba Group, Bristol-Myers Squibb, Dominion Energy, Becton Dickinson, Regeneron Pharmaceuticals
  • Friday: Toyota Motor, Allianz, NTT, CVS Health, Enbridge
  • Saturday: Berkshire Hathaway

Economic Calendar Highlights for today (times GMT)

  • 0900 – Norges Bank Rate Decision
  • 0900 – UN FAO’s October World Food Price Index
  • 1000 – Eurozone Sep Retail Sales
  • 1000 – EU Commission Economic Forecasts
  • 1100 – ECB Villeroy speech
  • 1330 – Initial Jobless and Continuing Claims
  • 1445 – Bloomberg Consumer Comfort Index (Nov 1)
  • 1530 – EIA Natural Gas Storage Change
  • 1900 – FOMC Rate Decision

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