Head of FX Strategy
Summary: US and European equity markets are in a funk on US election uncertainty ahead of Election Day tomorrow and as Covid lockdowns descend across Europe, with England also announcing its own month-long lockdown at the weekend. Crude oil punched to new lows since May, although the mood to start the week in Asian markets was rather upbeat.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - whether it is the Covid situation in the US Election uncertainty or the disappointment in the outlook from the megacaps reporting after the close last Thursday or all of the above, US equity markets have dug themselves quite a hole, with the S&P 500 closing below its 100-day moving average late last week and threatening the major 3,200 area low from September, arguably the last support ahead of the 200-day moving average toward 3,115. The Nasdaq 100 index closed Friday right on its 100-day low just above 11,050. Its range low from September is near 10,650 and the 200-day moving average is still quite some ways off at 9,932.
Sentiment in Treasuries will depend on the US election, Treasury’s bond issuance plan and job’s data (30YUSTBONDDEC20). Even though the US election will be responsible for most of the volatility in the market this week, within the fixed income space the Treasury plan to issue bonds in the next quarter is extremely important. If the Treasury steps up issuance, and the Fed doesn’t expand its bond purchasing program, the long part of the yield curve can steepen fast. Large short positions in Treasury futures will also weight on Treasury sentiment, and if the market runs to safety, we might see investors unwinding these positions fast contributing to a rally in Treasuries the short term.
Stoxx 50 (EU50.I) - the levels around 2,850-2,870 seem to be the support area for now and a breakdown Friday’s lows would be a very negative technical development. European equities are starting up higher Monday morning despite the news over the weekend that the UK will also enter a new four-week lockdown which could be interpreted as investors are not expecting to become significantly worse from the current situation.
EURUSD – EURUSD has run out of range room to the downside as European sentiment nosedives on new Covid-19 lockdowns. And US futures positioning still suggests that there is a very large speculative long position in the pair that has only partially unwound (although the last snapshot of positioning data was last taken when EURUSD was trading above 1.1800 early last week). The 1.1600-1.1625 zone containing the lows from September is the last major area ahead of the big 1.1500 level, though arguably the 1.1400-1.1450 area is the key structural bull-bear zone. We won’t know the status for this super-major until we have a clear US election outcome, with a split US Congress (Republicans retaining control of the Senate) driving more USD upside risk.
AUDUSD – the Reserve Bank of Australia meeting tonight is arriving at a tense time for AUDUSD traders, not only because of the US Election uncertainty but also AUDUSD finds itself perched exactly at the 0.7000 level. The market already expects at least a 15 basis point rate cut and for the RBA to announce a formal QE programme at tonight’s meeting, but can the RBA surprise on the dovish side with a cut of rates all the way to zero and/or a QE purchase amount beyond what global central bank peers are carrying out? In general, AUD was already vulnerable on recent weak risk sentiment and a correction in key commodity prices.
Brent crude oil (OILUKDEC20) and WTI crude oil (OILUSDEC20) - trade near a five-month low on renewed weakness driven by a combination of coronavirus related lockdowns hurting demand and a continued surge in Libya’s production, now at 800k barrels/day from 100k barrels/day in early September and targeting 1.3 million barrels/day by the beginning of 2021. These latest developments are likely to keep oil under pressure with the recovery in global oil demand being postponed indefinitely. Brent crude is currently targeting $35/b, the 38.2% retracement of the April to August rally.
What is going on?
UK Prime Minister Boris Johnson announced a new month-long Covid-19 lockdown. Schools, universities and essential stores are allowed to remain open during the lockdown, which Johnson said would have to be extended if the measures fail to reverse the Covid resurgence.
The German DAX finished October as one of the world’s worst performing equity markets – with a drop of nearly 9.5%, with the decline aggravated by a devastating 31% drop in SAP shares after their Q3 earnings report.
COT on commodities and forex in week to October 27 saw a near unchanged net-long position across 24 major commodity futures at 2.3 million, the highest since February 2017. It did however disguise a renewed rotation out of energy and metals into agriculture. Biggest reductions were seen in WTI crude oil, natural gas and live cattle while most of the buying was concentrated in corn, soybean oil and sugar. Dollar short covering extended into a fifth week with the short against ten IMM currency futures and the Dollar index being reduced by $0.9 billion to $26.6 billion, a three month. This ahead of a strengthening safe haven bid which has seen the dollar reach a one-month high this Monday. More on www.analysis.saxo.
What we are watching next?
US election scenarios and assessing the odds. In two pieces over the weekend, we run down the evidence, strong or not, that the overriding expectations of a sufficiently strong Democratic Blue Wave to avoid Election drama are misplaced, highlighting voices from those who are still suggesting the risk of a strong Trump showing and especially highlighting how ugly the market action could get if we are facing a contested election scenario. Also, a look at how 2016 Election Night unfolded and the market reacted in real time to the result as it crystallized, as well as what to watch for this time around.
Today is Manufacturing PMI day for the world, though few are looking for much relevance in the numbers today and are looking more toward the Services PMI surveys on Wednesday, and even more so, for evidence of how deeply the latest set of lockdowns are affecting activity, as well as how a Democratic win at the election might affect the outlook in the US, although keep in mind that Trump will remain president at least until inauguration day in late January.
Sterling on any further Brexit breakthroughs this week – word at the weekend is that the two sides may be reaching a compromise on the thorny fisheries issue, although decisions on specific quotas may be deferred until the other side of the end of the Brexit transition period at the end of the year. (And isn’t that likely to prove the model for any “deal” - some framework of principles that allow either side to challenge the other side’s perceived misbehaviour down the road if the terms are seen as having been violated, but avoiding any heavy tariffs up front to avoid disruptions in the near term?)
Q3 earnings season continues this with more focus on Europe. Last week’s big earnings from US technology companies are done and they bolstered the view that the digital part of the economy is doing quite well. Meanwhile Q3 EPS in S&P 500 is now well ahead of estimates for the quarter rebounding more than 35% q/q from Q2. This week more European companies will report and will obviously be important given the depressed equity indices in Europe but also in relation to the outlook given new lockdowns.
Economic Calendar Highlights for today (times GMT)
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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.
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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.
