Faith of Flight

This is the moment of truth for market participants who are trying to see past the US election and the coronavirus. We have warned on how difficult that will be and saw that manifest on Wednesday as risk trades were crushed. Thursday will be another day with a packed economic calendar. The following chart is what Ashraf has been continuously updating the members of the WhatsApp Broadcast Group regarding the real time developments of the USD-Gold-RealYields triangularity.

The market has shown a remarkable ability to look beyond the pandemic to a future of low interest rates and high fiscal spending. There has also been a clear confidence in a Biden win with a high probability of a blue wave.

However a fresh surge in cases along with ever-present fears of a contested election finally pushed the market beyond the tipping point. It's a sign that fear of the weeks and months ahead has conquered faith in what is coming beyond.

We have been warning for weeks that the risks of the coming months weren't worth the rewards, especially with equities already at elevated levels. The chance of some last-minute election fears was always uncomfortably high.

At the same time, there is a case for wading into risk before long. The kinds of virus curbs the EU is doing have proven they can work. While Q4 is now looking like a flat quarter or worse, harsher measures improve the outlook for Q1 and beyond. In the US, the polls in the midterms were right and given that pollsters have likely overcompensated for the 2016 Trump surprise, there's a much better chance of a blue wave than is priced in.

In the shorter term, the focus will be on the wave of news and events scheduled Thursday. The consensus thinking on the ECB is that they will wait until December to act but the new curbs in Germany and France dramatically increase the odds of a surprise, or for Lagarde to pre-announce December action. In the US, the main headline will be a record quarter of GDP growth at +30% q/q annualized but the weekly initial jobless claims report will tell us more about the current state of the economy.

Late in the day there will also be earnings from Apple, Amazon, Facebook and Alphabet. So far this earnings season it has been tough for companies to make any headway, even on big earnings beats.