Intraday Market Thoughts Archives

Kiwi and Loonie went their separate ways. The RBNZ highlighted on Thursday that it's “actively working” on negative rates as central banks continue to press for further easing but the market may soon try to set a floor. Even with the more-aggressive negative rate talk, the New Zealand dollar hardly wobbled in a sign that rates are nearing a limit. CAD soared across the board as US crude regained 41. A new Premium trade was issued on Wednesday. Below are 2 mystery charts. Care to guess?

The default mode for central bankers at the moment is to do more. 10-year rates in New Zealand are at 0.55%. While that's more than 100 bps above German 10s, it remains a pitiful level that undermines faith in the central bank ever hitting its 2% target. Moreover, the New Zealand's economy has a host of geographic and demographic tailwinds working for it, along with its continued excellence at corralling COVID-19.

Still, it's increasingly clear that more is coming. This was hinted in the September monetary policy review but comments from two top officials Thursday were more explicit. Yet after a small dip, the kiwi bounced right back. The rates market also brushed it off.

It's similar elsewhere as central banks mull ways to do more even as bond markets are signaling they've done enough. US 30-year rates are a market we're watching closely at the moment and they quickly rebounded Wednesday from the stimulus surprise on Tuesday. Perhaps that's owing to polls showing a blue wave but it's also an acknowledgement that 1.5% for 30 years is a dismal return and that with central banks and governments using the full force of fiscal and monetary policy, betting against them is a bad bet.

With the RBNZ still set to act, we're clearly not there yet on a central bank bottom but in the longer view, it's increasingly clear that the pandemic will be the top for bonds. Whether it's a blow-off or a long topping process is a tougher question that will be answered by inflation but in all likelihood we've seen a sea-change in government attitudes on spending that will last a decade.

Just when markets began to price in a big stimulus package, the President pulled the rug out and sent markets crashing lower. The announcement that he was calling off stimulus talks led to a classic risk off move with JPY leading the way and AUD lagging. Markets will be sorting through it in the day ahead. Below are some of today's comments from our WhatsApp Broadcast Group members on the result of today's messages and Premium video following "Trump's Surprise".

Trump tweeted that stimulus talks were off on Tuesday in a surprise move. This has been a long, confusing tale that highlights the difficulty in trading around politics. A deal appeared to be completely dead three weeks ago but was then resurrected and appeared to be making steady progress.

Ultimately there was no deal to be made with the gap between Republicans at $1.5T and Democrats at $2.2T too tough to breach. No doubt that liability protection and how that money was spent was also a big factor.

While many market-watchers were pointing to Trump's health as the reason for market moves Monday, we stringently disagreed. The reversal in those moves on this (as Trump continues to heal) bears that out. The S&P 500 gave up all its gains for the week and Treasury yields gave back most of Monday's rise. In FX, commodity currencies and EM were hit hardest.

Under any scenario, the decision by Trump is bizarre. A recent Times/Siena national poll showed voters overwhelmingly supported a new $2 trillion dollar stimulus package by a 72-23% margin. It's even worse to take ownership of talks breaking down by being the party to walk away from the table.

With that, the odds of a Democratic sweep on Nov 3 rise. If that happens, it's going to lead to a reversal in today's moves but it's tough to envision markets pricing it in now because it hinges on 2-3 senate seats flipping and those could be held even if Trump stumbles to the finish line. So the trade for now is probably more money in search of safety.

One risk is that Trump's stimulus tweet was some kind of negotiating ploy or that he backtracks in the day ahead. With this President, we're always just another tweet away from a complete reversal.

Powell speech came and went and indices remain in tight ranges, following a strong US open. Rising Treasury yields and yen crosses highlighted rising appetite for stimulus and deficit spending in the US. The Swiss franc was the top performer while the yen lagged. The ECB faces a tough test on what to do next. This week's Premium video (English+Arabic) is posted below, highlighing the application of the latest chart analog and top-down approach into metals and FX. 

The combination of Trump's leaving the hospital and increased odds of the economic stimulus is further aiding indices. Meetings between Mnuchin and Pelosi will continue Tuesday after an exchange of proposals.

It remains challenging to handicap the odds of a deal and the likelihood it will get through the Republican-controlled Senate, but the jump in Treasury yields highlights the potential for $1.5-$2.2 trillion in additional spending, with the growth/inflation impulse behind it. The move was led by long-dated bonds as 30-year yield rose 8 bps to above the mid-June and August double top. At 1.58%, 30s also crossed the 200-day moving average for the first time since March 2019.

A number of yen crosses also made significant moves and breaks of the recent ranges to the upside.

Beyond the guessing game on stimulus, the general willingness of both parties in Washington to consider more spending just before the election highlights the change in the electoral mood: Austerity no longer wins elections and that has repercussions far beyond the US vote.

Polls continue to show a moderate-to-high likelihood of a blue wave and that would enshrine a series of stimulus measures. Monday was a taste of the price action that will persist in financial markets if that comes.

Another risk-on Monday, with rising stocks and falling USD. But will it continue in light of the upcoming conference by NY State governor Cuomo announcing further closures. Trump's COVID diagnosis on Friday was a political shock but beware trading the sensational headlines; it's the $2 trillion stimulus discussions that are moving markets. The ISM services index jumped to 57.8 from 56.9 to beat expectations of 56.2. The chart below shows rising bond yields may stary to weigh on metals and place stocks' ascent under scrutiny near 0.80%.

The health of the US President will be a preoccupation in the days ahead as official information conflicts with leaks in an administration that's earned a reputation for misinformation. The initial jolts in markets highlight the emotion in the market but baring the death or incapacitation of the President, it's not going to be a major market mover. The election will eventually have consequences but given the poll misses in recent years, market participants are reluctant to shift positions until after the votes are counted. For what it's worth, the latest polls show a rising chance of a Democratic sweep but they could shift in the days on Trump's diagnosis.

It's worth noting that so-called conventional wisdom among the investor community is starting to consider a Biden victory as a posistive for risk appetite as he maintains the 14-point lead over Trump.  

What's less fuzzy is the scope for more US stimulus. Talks appeared dead two weeks ago but a report Friday confirmed something that we've suggested: the White House is pushing for Republican compromise in the hope that it will boost Trump's chances. That likely means something closer to the Democrats ask of $2.2 trillion rather than the $1.5T in the latest White House offer. The Senate could still block it but McConnell said Friday after the market close that a deal was “getting closer” in a hint that he's on board.

The funds, which will include new unemployment benefits and another $1200 cheque for most Americans, will be the decisive factor in the path of the US economy through January. The package could also have critical knock-on effects for global demand. It was clear on Friday that equity markets were trading around these headlines rather than Trump's health. Expect that to continue.

As for FX, the currency market shrugged off the drama with surprising ease on Friday with Brexit and European COVID headlines leading the market.

Stimulus talks will also overshadow data on Monday but the current trajectory of the economy is also highly uncertain.