Traders and investors alike may slowly but surely come around to the idea that last week’s market rout was Tech sector-specific rather than any real change in underlying sentiment.
There was nothing ‘fundamental’ behind last week’s equity sell-off, but it will most certainly take a while to clear all the option-market after-shocks.
However, the sell-off provides a stark reminder that with everybody holding on to the same side the vaccine life-raft, it should not be too unexpected that when the seas turn rough, many will fall into the drink on the first significant starboard list.
Still, investors have ample flotation thanks to the US Federal Reserve and the fiscal harness would allow them to hurry back aboard with relative ease if they so chose.
Traders will be looking for more evidence if investors will continue replacing cash positions with options to reduce risk or jump back into cash. While these are important technical factors amid a market exuberantly rallying on “stock split” announcements, it does not take away from the fact that Tech remains very well owned.
Concentration risk remains elevated, so we could see more tech sectoral sell-offs on a rotation basis while awaiting news on a possible vaccine.
Brexit is back
European equities were stronger Monday, Stoxx600 up 1.7%, FTSE rising 2.4%, but Brexit is back with a bang.
I hope we are getting near the end of this saga, but it seems we are right back to where we were six months ago.
Overnight, the EU’s chief Brexit negotiator Michel Barnier responded to a report that the UK sought to pass a law that could “eliminate the legal force of parts of the withdrawal agreement” relating to state aid and Northern Ireland customs. Barnier indicated that “everything that has been signed in the past must be respected.”
His comments suggest any withdrawal agreement changes would mount a significant obstruction for a trade deal.
Separately, over the weekend, UK PM Johnson set a deadline of October 15th to a trade agreement to be reached: “if we can’t agree by then, then I do not see that there will be a free trade agreement between us.”
While the base case remains for a deal to be struck, given the non-willingness to back down and the UK government’s argumentative tone since before the summer, the tail risk of no-deal Brexit is high.
Is gold falling out of favour?
I think it worth reiterating that there has been truly little real money buying of gold over the past two weeks, and it feels like the yellow metal is falling out of favour.
Fast money types are showing some interest to sell on upticks, and I suspect positioning length could be a further trigger if the downtrend that started this month extends. Indeed the 6-8% correction at one-point last month has a lasting impact.
Traders also need to be mindful of the bond supply coming to the market this week which can pressure rates higher. With the Fed now in a blackout ahead of next Wednesday’s meeting and little data of note until Friday’s US CPI print, the focus will be on supply.
Forex markets: Euro may come under pressure?
As FX traders continue to follow the coronavirus pandemic track in Europe, the spotlight shines specifically on the ECB’s latest monetary policy decision, where verbal intervention concerns remain elevated. During President Lagarde’s subsequent press conference, she could heed ECB Chief economist Lane’s inflation warnings and talk the Euro down.
Still, with Brexit in the news, it is challenging to categorise the Euro separately from the discussion. Hence the EURUSD is likely feeling some knock-on pressure from the Pound slide as GBP is under a bit of tension in Asia ahead of the resumption of Brexit negotiations when Barnier arrives in London today.
Yuan trades well
The Yuan continues to trade well, but I think there is more to the story than just robust data. Longer-term bullish positions are getting built around the idea that financial openness remains a critical structural theme for China in 2020.
At the 2020 China International Financial Forum held on September 6th, Vice Chairman of China Securities Regulatory Commission (CSRC), Mr Fang Xinghai shared China’s four-step plan of pursuing further opening up of its equity market:
• Expand the scope of investment products
• Refine regulations governing opening up policies
• Pursue two-way opening up of securities and futures industry
• Strengthen collaboration with global financial regulators
The ambitious plan for RMB bonds and the equity market indicate that China remains passionately committed to financial opening up. And they continue to implement capital market and capital account reforms at an accelerating pace in 2020.
A quicker pace of internationalising the Yuan could be structurally very favourable for the Yuan into 2021.
Similarly, the short USD positioning versus the Indian rupee seems to have accelerated since a pivot in RBI’s intervention strategy.
However, India has crossed Brazil to become the second-worst affected country with 4.2 million Covid-19 cases and third-worst in Covid-19 deaths (71,642). So, the recent ambitious INR rally has given way to the Covid-19 gnarly but continues to find “carry” buyers on sell-off as it is unlikely that the authorities will be in favour of implementing more stringent lockdown measures,
The ringgit’s overachieving way of late has yielded to general global risk sentiment, a firmer dollar, and tumbling oil prices struggling to pull off the mat in the face of weaker global demand.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp