Market Quick Take - October 26, 2020

Macro 6 minutes to read

John Hardy

Head of FX Strategy

Summary:  Markets are starting the week in a cautious mood as the clock runs down on the prospects for a US stimulus package before the election next Tuesday, and as Covid-19 numbers in Europe and in the US continue to spike, with severe new restrictions on activity spreading across Europe. Early voting levels in the US suggest a strong result for Democrats.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - ongoing stimulus uncertainty and perhaps the uncertainty on the US election outcome are handcuffing the major US equity indices in a tight range near pivotal levels around 11,500-600 in the Nasdaq 100 index and around the 3,400 level in the S&P 500 index. The US earnings season is in full swing with the Apple, Amazon, Facebook and Alphabet all reporting on Thursday.

EURUSD – the EURUSD supermajor slumped back a bit lower to start the week in Asia. On Friday, the pair posted a strong rebound after poking below the tactical 1.1800 pivot area and closed near the recent highs. The current price this morning of 1.1835 is nearly exactly halfway between the September high at 1.2011 and September low of 1.1612 as traders and investors are perhaps reluctant to take strong directional bets on the US dollar ahead of next week’s US election, while Covid-19 uncertainty has darkened the outlook for Europe.

EURGBP and GBPUSD – Brexit negotiations will be extended to this Wednesday after they were scheduled to wrap up at the weekend. EU chief negotiator Barnier will stay in London for the duration and the two sides are said to be in the “intensive phase” of talks and the UK side is said to be optimist. This week should give an impression of whether the two sides are moving closer to agreement. Sterling traded sideways after weakening on Friday slightly. The key level for EURGBP remains 0.9000 if a breakthrough is announced and unleashes a surge of sterling buying. GBPUSD has been choppy and has given up much of last week’s gains as it eyes 1.3000 again.

Thirty-year Treasury yields (30YUSTBONDDEC20) fall slightly as we are getting closer to US election day – The US yield curve flattened slightly as there might not be a clear winner on the 3rd of November. Weighting on lower US Treasury yields are coronavirus cases continuing to rise and a stimulus package that will not arrive by election day. Even though in the short-term Treasury might rally, we still believe that in the long term the US yield curve will steepen. There are big short positions in long Treasury maturities as the market expect a clear Democratic sweep that will inevitably increase spending and push yields higher.

Gold (XAUUSD) remains stuck within its established range as the market continues to struggle for direction. Today’s narrative has been driven by the fading prospects for a “blue wave” in next week's election, a development that may reduce the reflation and stimulus narrative as the Democrats need the Senate to push these through. Adding to this, the markets must also navigate fading prospects for a pre-election stimulus deal, a stronger dollar and the renewed surge in coronavirus infections. For now, gold remains stuck between $1930/oz and $1885/oz.

Italy enforces new lockdown measures, which are not welcome by the population (10YBTPDEC20). We might see BTPs falling this week as new lockdown measures are imposed in Italy amid a spike of coronavirus cases. During the weekend we have seen violent protests as citizens do not want to comply with the lockdown. A wider spread of BTP over Bund might represent a buy opportunity as in the long term the ECB will need to print more money to keep Europe afloat.

SAP (SAPG:xetr) - biggest negative surprise this morning with the largest European technology company cutting 2020 revenue outlook as demand picture has weakened from last update due to new restrictions negatively impacting business confidence. It is especially the cloud business that is suffering from the weakening demand most likely because moving to the cloud is a “new decision” for SAP’s customers which comes with extra transition costs and thus not something businesses are likely to do when there is more uncertainty.

What is going on?

France recalled its ambassador to Turkey. Turkish president Erdogan protested Macron’s treatment of the issue of cartoons of the prophet Mohammed after a French teacher was murdered and beheaded by an immigrant of Chechen origin for showing cartoon of the prophet. Erdogan said Macron should seek psychiatric help and protested the treatment of Muslims across Europe. USDTRY traded above the 8.00 level this morning and TRY is on the defensive after the Turkish central bank last week failed to hike rates as expected.

Covid-19 cases accelerate in many countries and authorities are responding with more restrictions. The case count in the US and France has spiked to a record in recent days, with the US reporting nearly 90,000 cases in a single day, while France reported more than 50,000 cases for the first time on Sunday despite widespread curfew measures. Spain has announced a nationwide curfew after its daily case count hit more than 20k late last week and Italy saw its daily case count likewise spiking above 20k and announced new restrictions as well. The preliminary October Services indices on Friday for France, Germany and the EU were at 46.5, 48.9, and 46.2, respectively.

Early voting in the US is breaking records. That is no major surprise given the Covid-19 outbreak, but specific states are seeing such a strong surge in early voting that overall turnout could be the highest in many election cycles in the US, depending on the turnout on Election Day, where the majority of Republicans have indicated in surveys that they will vote. Texas, for example, 7.2 million have already voted, most of them early and in person, with some mail in votes as well. That compares with a total turnout in 2016 of just under 9 million. A new Texas poll at the weekend showed a slight edge to Biden and strong turnout is thought to favour Democrats in general. The state last voted Democratic in 1976 and a Trump loss there would suggest that Biden will win the US election in a landslide.

Hedge funds increased best on rising commodity prices to highest since early 2017 in the week to October 20. A week where the Bloomberg Commodity Index, led by industrial metals and grains, rose by 2%. Bullish bets across 24 major futures market tracked in our weekly “Commitment of Traders” report increased by 8% to 2.3 million lots with new +12-month highs in natural gas, copper, corn, KCB wheat, sugar and cotton. Net short positions were held in just three contracts: Ny Harbor ULSD (diesel), platinum and feeder cattle.

What we are watching next?

Global commodity markets face an important week with a number of Big Oil companies (Royal Dutch Shell, Equinor, Exxon Mobil, Chevron, Total) reporting results at a time where the sector is out of favor among investors and crude oil remains stuck in the low $40’s while a resurgent coronavirus pandemic triggers fresh curbs on mobility. The countdown to the U.S. presidential election will be watched closely given the potential different trajectory for wind, solar and emissions rules. In China, the world’s by far biggest consumer of raw materials, the CCP will gather to map out the party’s priorities for the next five years and beyond.

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 stimulus package status? Exchanges between House Democratic leader Pelosi and White House Chief of Staff Meadows saw the two accusing one another of “moving the goalposts” on spending priorities and the tone was not optimistic, although Pelosi said a package could be passed this week, while the time schedule is now so short that the Senate will have little time to debate before the election next Tuesday.

The 14th plenum of the Chinese Communist Party starts today and stretches through Thursday of this week. This is the meeting at which China’s political leadership establishes its priorities for the next five years. Many believe that the explicit GDP targets are less likely to be a focus, while a policy of “dual circulation” (encouraging more consumption at home while keeping existing support for trade policy) and an acceleration of opening up China’s financial markets to foreigners are thought to be priorities.

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.

  • Tuesday: Ping An Insurance Group, Microsoft, Novartis, Pfizer, Merck & Co, Eli Lilly
  • Wednesday: China Life Insurance, UPS, Visa, Mastercard, Amgen
  • Thursday: China Construction Bank, Sanofi, NTT DOCOMO, Apple, Amazon, Alphabet, Facebook, Comcast, Shopify
  • Friday: Novo Nordisk, Agricultural Bank of China, Bank of China, Charter Communications, AbbVie, Exxon Mobil, Chevron, Honeywell

Economic Calendar Highlights for today (times GMT)

  • 0900 – Germany Oct. IFO Survey
  • 1230 – US Sep. Chicago Fed National Activity Index
  • 1400 – US Sep. New Home Sales
  • 1430 – US Oct. Dallas Fed Manufacturing
  • 2300 – South Korea Q3 GDP
  • 0230 – Australia RBA’s Debelle and Bulluck to speak

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