The euro strength of the past week remains a puzzle. Some of that is a better tone on Brexit but the resurgence in the coronavirus no doubt dims in the economic outlook for Q4 and Q1 2021. No doubt positioning ahead of the US election is playing into it.
The growth in virus numbers in Europe is daunting. In Italy cases hit a record 21,273 on Sunday. A week earlier, they were at 10,009; a week before that at 5372; and a week before that at 2499. The nearly 100% w/w growth rate is terrifying and the government responded with a partial lockdown that will limit hours for restaurants while closing entertainment and gyms.
A similar dynamic is unfolding elsewhere. In Spain a national curfew from 6 am to 11 pm was imposed and a tighter lockdown is rumored in France.
In the US, cases have spiked to a record 82K cases and there are rising cases in the middle east and the largest outbreak in China in months.
The market may be preoccupied with the US election at the moment and not appreciating the possibility of much slower growth in the next five months. We may be nearing a tipping point where it can't be ignored. Some countries have shown resilience to the virus and there's no chance that lockdowns are as broad as in March but combined with waning stimulus money there's a big risk that consumers retrench in what Biden warned will be a 'dark winter'.
Oil may be particularly vulnerable a slowdown in activity, especially with Libya set to add roughly 800kbpd in Oct/Nov.
CFTC Commitments of TradersSpeculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.
EUR +166K vs +168K prior GBP -2K vs -10K prior JPY +14K vs +20K prior CHF +14K vs +12K prior CAD -19K vs -14K prior AUD +7K vs +4K prior NZD +6K vs +6K priorSterling shorts were fortunate (or smart) to square up ahead of last Wedneday's announcement of a restart of negotiations. However the lack of follow-through in GBP afterwards highlights the uneasiness of the market.
1) Lame duck stimulusThe market continues to get bounced around by stimulus headlines but this is clearly a game where neither side wants to appear to be walking away. Pelosi highlighted progress on Thursday but was asked at the end of her press conference if there had been progress on state & local funding or liability, she said 'no'. Those are the two areas that have held up negotiations for months and doom hopes for a real deal.
So the question after the election is whether a deal is possible in the lame duck session in November, before the new congress is sworn in. Assuming a blue wave, it appears highly unlikely unless it's something small and targeted towards hard hit businesses like airlines. For the broader economy, it's going to have to wait. That's likely to trigger severe market disruptions even with a huge package on the way in January/February. Can the market look through it? Probably but it will be a tough test.
2) COVID resurgenceFrance and Holland reported record case numbers on Thursday and the US is clearly seeing an uptick in cases again. US cases regained the 70K mark, while Italy, France and Luxembourg will announce curfews. Another wave is here and the speed of the rise in cases – particularly in France and a few US states – is troublesome. Flu season doesn't peak until February and expectations for growth around 4% annualized in Q4 and Q1 are too optimistic. Again the question will be whether the market can look through it and based on the past six months the answer is that it probably can, but the wall of worry is building.
3) Negative ratesCentral banks in a number of countries are flirting with negative rates and given the expected virus resurgence and concurrent slowdown, the odds that they're used is rising. The hollowing out of eurozone banks might be a coincidence but the financial sector is one of the big laggards coming out of the pandemic and negative rates are one of the main reasons why. If there's some success in Australia or the UK, could the Fed have another look?
Other themes to watch will be: digital currency adoption, rising home prices, inflationary pressures, a green energy boom, OPEC's December meeting, Biden's promise to hike taxes 'on day 1'.
Join Ashraf for his webinar on the latest lntermarket fractals applications next Tuesday (Oct 27) at 17:10 Eastern (21:10 London/GMT) (time difference will be 4 hrs not 5 hrs during that week).
With every bluff and missed deadline in Brexit negotiations the market looks more like Charlie Brown repeatedly having the football pulled away at the last moment. We highlighted earlier in the week that a deal was still an 80% likelihood but you can never be sure with politicians.
The EU and UK put the latest spat aside and now will try to hammer out a deal before year end. The same problems on fisheries, a level playing field and dispute resolution remain and there's no way of knowing how far European leaders will go to get their way. For Johnson's part, he issued another threat, saying the UK was prepared to exit on Australia terms.
Sterling certainly bough the headfake as it climbed to 1.3150 from 1.2950 in a break to the highest since September 7. Take it as a sign of a reactive market rather than one sniffing out political outcomes. There's a lesson there for the weeks ahead.
In a larger breakout, Bitcoin soared through the August high and is nearing the target from Ashraf's trade from the March lows. It was a textbook break as it came on the big news that PayPal will let users hold and spend BTC along with three other cryptocurrencies. We await the details -- and fear a prohibitive fee structure – but it's undoubtedly good news as it opens up a market of 26 million merchants and gives crypto a major stamp of approval.The day ahead features the final Trump-Biden debate. It's the final opportunity for Trump to swing a vote that appears to be getting away from him. We take the latest rise in Treasury yields as a sign the market is betting on more reflationary stimulus – the kind that's only possible in a blue wave.
Perhaps we were naïve to think Pelosi's stimulus negation deadline was as advertised. She held another round of talks with Mnuchin on Tuesday as her 48-hour self-declared deadline ticked down. Afterwards, she said negotiations would continue for another day, leaving no sense of when the real deadline is.
We've seen so many Brexit and political deadlines ignored in the past few years that we should have known better. That said, we're now 13 days to the US election and that is a genuine deadline. Next Monday the US Senate will also take up the confirmation of Amy Comey Barratt for the Supreme Court, eating up much of the remaining time. So maybe we weren't naïve to see the deadline as a bluff, but naïve not to see that the real deadline has already passed.
For his part, Senate Republican leader Mitch McConnell said he will have a vote on any stimulus package that passes the House and is endorsed by the White House; but importantly he said the vote would come 'at some point' suggesting it might not be until after the election.
In the world of central banking, the RBA underscored two ongoing shifts in the latest minutes. The first is more open-mindedness towards negative rates, or getting closer to the lower bound. AUD was rattled Tuesday by that talk and the BOC earlier this month also left the door open for negative rates while the BOE continues its long flirtation with the idea.
The second is the abandonment of forward-looking inflation targeting in favor of regimes of waiting for actual inflation to materialize. The idea has taken central banks by storm as a way to strongly reinforce forward guidance.The market is still skeptical that central banks will hold rates near zero when inflation rises above 2% but if so, the result could be inflationary and a big boost to asset prices or yet-another hit to central bank credibility.