Investors have remained cautiously optimistic that the US Congress will agree on fiscal stimulus measures aimed at the economy’s most struggling parts.
However, there are few indications a deal could be reached before Election Day.
The rise in equities came despite roadblocks to further near-term US fiscal stimulus that appear to remain firmly in place.
All but a minor roadblock for investors, so it seems, the markets continue rallying on optimism that the package will get done, be it a piecemeal one before the election date, which will undoubtedly bridge the gap, or the more expansive post-election top-up policy boost.
But at the end of the day, investors are revelling on the Blue Wave rally bus where the first order of the day come Nov 5 will be to open up the stimulus taps, and stocks are rallying in kind.
The seemingly positive ramifications of a possible Democratic clean sweep in the US election continue to play out globally.
Looking further out, the pro-fiscal / increased regulation narrative of a Biden presidency should prove to be supportive for European markets, as investors sell out of tech/momentum names given the heightened regulatory risk and switch into more infrastructure-exposed sectors/regions. Though I would exercise some caution at current levels, with a lot now priced into markets for a ‘blue sweep.’
Investors pricing in Biden win
It’s getting easier to understand why investors are moving towards pricing a win by Democratic candidate Joe Biden. On Wednesday, a poll published by Quinnipiac University put Biden ahead in two key states, Florida and Pennsylvania – by pretty insurmountable margins and clearly into ‘Blue wave’ territory.
Regardless of the election outcome, the new president will be focused on getting the US back to full employment, fast. In this modern era, the narrative could shift to increased deficit spending, higher long-end rates, and higher inflation expectations.
These macro factors support cyclical stocks, but it could be a bumpy ride as heightened volatility typically accompanies new market regimes. Ultimately the stimulus boost gives way to corporate tax hikes and market return focus on earnings.
Oil prices surge on hurricane impact
While tracking broader markets on the very same ” Blue Wave” stimulus and reflationary impulse, the oil market took flight from a more sinister wave in the form of a life-threatening storm surge as a strengthening hurricane Delta has forced extensive shut-ins in the Gulf of Mexico.
The confirmation from Equinor would need to shut in its giant Johan Sverdrup oilfield if the current strike among some offshore workers was to extend to Oct 14 takes more barrels off the market, which is always a welcome relief for the oil complex that is struggling to rebalance.
Rumours started to circulate early in London that last week’s Oil market beat down was compounded by the Hacienda Hegde. Each year, Mexico rolls the dice and makes huge options bet on oil prices’ future direction.
It’s so predictable that it has a nickname in financial circles — the “Hacienda Hedge” or the “Pemex Hedge. That partially explains the noticeably massive action on the Options markets that I alluded to in several recent notes. So, with the weight coming off the options markets, the offer side of the market is a little bit cleaner, and the news probably triggered a bit of a short squeeze.
Most currencies are in narrow ranges this morning as EURUSD FX vols have come off pretty aggressively overnight. The “risk-on” narrative is probably keeping the EURUSD in check despite dovish ECB rhetoric, disappointing data, and continued increases in COVID-19 case counts in the Eurozone has failed to dent the EUR.
Pound seems immune to Brexit talks
With a week to go to the EU Council meeting on Oct 15, a potential deadline for Brexit negotiations, GBP remains immune. Choppy headline-driven price action persists in GBPUSD. Given the back and forth rhetoric on Brexit as negotiations continue, headlines that the UK plans to walk away from negotiations if no deal is seen by Oct 15 will lead to another selloff in GBP.
Oil price rise favours the Ringgit
The Ringgit should trade on a more favourable tone today with both risk sentiment and oil prices taking flight overnight.
I think the duelling narrative of risk on where muscle memory suggests selling the dollar versus higher US yields where historical correlations tell one to buy the US dollar are holding the Greenback in stasis.
Since March, the US dollar has closely tracked US 10y real yields. However, the past week hints at a decoupling between the two series, after a 7 bp rise in real interest rates and a broadly flat USD since Oct 2, which kind of supports my views.
For higher yielders in Asia, Democratic sweep of Congress polls would drive renewed steepening in the US Treasury curve, accompanied by higher real yields, which reduces the attractiveness of high-yielding currencies vol-adjusted basis.
Gold rises on stimulus hopes
Gold is trading higher due to stimulus expectations, but the yellow metal is getting held back by the prospects of higher US yields and the Euro offering little support for Gold while trading below 1.1800.
While the “Blue Wave “stimulus deluge is favourable for Gold, the resulting US treasury curve steepeners not so much.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi