The US election will capture the world’s attention and most of all for the markets’ indulgent concerns.
The imagination of financial centres around the world is set to roll out their election playbooks, with many expecting a Democratic sweep, which is the key to unlocking Congress’ ability to deliver significant fiscal simuls and benefit the US and global markets at a time of need.
There was a broad move higher out of the gate in US equities. The activity in Momentum/Tech faded as the day went on.
Given the stock market concentrations and narrow leadership, the overall tape always struggles to shift higher if Tech does not pull its weight as positioning into tomorrow’s election with Big Tech regulation, climate-change mitigation, and energy policies all in play.
Price action in global equities was very encouraging, as has been the case for a couple of days now, with the market taking additional lockdown measures in its stride.
There is likely some seller exhaustion given the recent de-grossing. The blue wave impulse is starting to emerge with Biden holding a clear lead in the polls.
Interestingly, price action in Travel & Leisure names is incredibly encouraging, suggesting lockdowns are, by and large, priced in and that the market is beginning to look through the temporary hit to demand due to limited lockdowns into the end of the year.
Also helping risk was better economic data (Chinese and European PMIs) and the relative lack of volatility in US election polls over the last few days, especially compared to the run-up to 2016.
Given that some significant macro hurdles appear to have been cleared in the near term, the set-up looks supportive, looking at positioning and broader macro risk indicators such as rates, which continue to grind higher.
Now we are in the starting blocks to make the final dash to the most important event of the year, if not the next four years, that being the US presidential and senate elections.
The market will probably assume that if Biden takes Florida, it is game on for the Blue Wave, but the correlation between presidential results and the Senate outcome is not 100% clear.
Therefore, I would be wary of the first reaction if the Democrats lead in the presidential race. I will focus more on Senate outcomes.
When nothing seemed to be going right for oil markets, prices jumped overnight after Russia’s government is said to be in talks with local producers to extend the OPEC+ output cuts.
With the Central Bank of Russia (CBR) in no position to defend the Ruble through dollar intervention and unwilling to dip into their gold reserves, which they would probably prefer to sit in the vault collecting dust, the Kremlin has effectively stopped two gaps with one bush, defend oil prices and effectively intervene in the Ruble precipitous decline after Russian Energy Minister on Monday met with Russian oil producers to discuss the possibility of extending the OPEC+ production cuts by three months.
All positive for oil prices, although the reason these changes are being contemplated is that demand is recovering more slowly than initially envisaged, coronavirus cases are spiking again, Libyan production is ramping up much quicker than expected, and in Russia’s self-serving case, to defend the Ruble to avoid an even worse economic collapse from COVID-19.
But the real key to unshackle oil prices from scrapping the bottom of the barrel is having both Russia and Saudi Arabia singing from the same song page in a sign of unified support to defend oil prices.
Currency markets in holding pattern ahead of US election
The US dollar is trading softer this morning due to the upbeat tone in the global stock market supported by robust economic data in Europe and China.
And with election polls showing Joe Biden retains a healthy lead in national polling and is also ahead in many key battleground states. The commodity linkers attract some attention even more so that the Kremlin can extend current oil production quotas into 2021 to defend the Ruble.
For the most part, currency markets are in a holding pattern into the election, but there have been some decent turbulence pockets to fade, none more so apparent than the Loonie.
The Canadian Dollar
The Canadian dollar is on an absolute ripper supported by climbing oil prices and its Blue Wave appeal.
After the USDCAD hit an air pocket up to 1.3370 on the overshoot slide in oil prices yesterday, the Canadian dollar has seen a big pivot higher. The Loonie is typically a direct beneficiary of more robust US growth, and Biden’s massive infrastructure splurge will flow into Canada via commodities, construction, and other building services.
The past few weeks, the road to Blue Wave Nirvana is tempered because the Canadian dollar is but an asset bubble sitting atop the Athabasca oil sands, where oil is quickly becoming an unwanted investment asset.
Euro off its lows
Although off the lows, EURUSD remains close to the critical support at 1.1625 amid growing awareness of the economic challenge of COVID-19. In a similar fashion to GBP, the EUR has rallied a little on rising equities and an upward revision to the flash manufacturing PMI for October.
Of course, the question now is where things move from here, given the increasingly stringent COVID-19 containment measures in place across the Eurozone and what a Biden presidency means for the Euro.
All eyes on the Malaysian central bank
The ringgit should have a good day with oil prices rebounding as blue wave playbooks getting rolled out. A Biden win is perceived to be the most favourable outcome for Asia risk since it lessens a new trade war chance.
But local eyes and ears will be trained on Malaysia’s central bank today, which is expected, by a wide margin, to keep its key rate unchanged as political uncertainty and a resurgence of COVID-19 hang like ominous clouds above Malaysia capital markets.
Unlike most of its Asian peers, the Bank Negara Malaysia (BNM) has sufficient policy wiggle room from negative inflation. Simultaneously, there is limited leeway for fiscal policy expansion after a record stimulus unleashed earlier this year, so it could be up to the BNM to do much of the heavy lifting for the economic recovery from here forward. Next on tap will be the latest government budget for 2021 on Friday.
Gold’s next move rests on US fiscal stimulus
Gold is down over the last two weeks, which is understandable as the COVID-19 outbreak is getting progressively worse in Europe and most of the world, leading to renewed lockdowns.
It seems this is now somewhat priced into European equities, and there does not seem to be much more room for risk reduction ahead of the next week’s US elections. The potential unlocking of another US fiscal stimulus package would be most flattering for gold.
With the blue wave impulse kicking in, gold remains in demand supported by hopes for a stimulus deluge that could trigger the elusive inflationary surge.
Equity, FX and Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi