US equities recovered overnight after President Trump walked back from his walk away on fiscal negotiations with the Democrats.

After the US close Tuesday, the President pressed stand-alone household stimulus payments and support for airlines. For their part, Democrats do not care.

Handwringing about those fiscal negotiations has been a common theme among Fed speakers in recent weeks and was also reflected in the September FOMC meeting released overnight.

The prospect of the Democrats sweeping all three levels of government continues to support stock markets in the run-up to the election day, which would put the Democrats in a position to all but a rubberstamp an energetic fiscal stimulus bill while lavishing the country with significant investment in health care, education, and infrastructure.

The only way traders will shift from this bias is if Trump recovers in the polls and would hurt reflation trades.

According to FiveThirtyEight (an opinion polls site), the recent shift in US presidential election polling for Florida is surprising, with older votes breaking towards Joe Biden in droves. The most recent polls given Biden a three- to a five-point lead, which translates to a 66% chance of carrying the state.

Perhaps it is dangerous to draw that straight-line market conclusion so early as there is bound to be more pitfall and pratfalls along the way as President Trump is looking to take back control of the election narrative and put the ball back in the Democrats’ court.

In the absence of any other suitable hedges for those eventualities, VIX appears to be the only game in town; thus, it remains elevated.

However, risk sentiment improved at the margins on optimism that Trump’s stand-alone $1,200 stimulus parachute becomes a reality. Indeed, that income support would be immediately channelled back into the economy, which could use a boost Q 3 stagnating recovery notwithstanding

Why the VIX is up?

But really, why is volatility going up when stock markets appear to be in a happy place, and the polls are skewing blue.

A big chunk of the implied volatility is a hedge against election time pitfalls and pratfall along with a contested result.

Let us not forget that volatility goes up when yields go up, direct and straightforward. That makes perfect sense. But to anyone saying higher yields will hurt the stock market at some point, but that is not how it usually works—higher yields at this point in the cycle signal reflation, not Fed hikes. Reflation is good for stocks. Higher bond yields are only bad for stock markets when you are worried about the Fed hiking too much.

Market nonplussed

I am surprised we have the US Fed pleading for fiscal and US fiscal talks halted on the same day, and the stocks do not care.

That tells me this is a regime shift pricing unfolding, which is all about the Blue wave tsunami.

Trump’s tweetstorm “proposal” is tiny and cannot justify the market turnaround. Unless markets believe it signals, he is ready to re-open negotiations, doubtful, but stranger things have happened.

Anyway, it looks like stocks are happy to play the waiting game after all Trump win: Good for stocks. Biden win: Good for stocks. Pretty neat keep buying, so it seems.

But ultimately, the market seems to have settled on the idea that a Biden win is bullish stocks, too, as the return of stability and the promise of modern market theory-style spending outweigh any concerns about future corporate tax hikes.

Contra view

On the other hand, I believe we are going to have a massive gnarly correction post-election similar to the 2018 December debacle on Democrat clean sweep that would prompt a “risk-off” mood as concerns about higher taxes and tech regulation outweigh hopes for higher government spending and a less aggressive tone on US-China trade relations.

Oil prices remain fragile

Supply driven commodity rallies are incredibly fragile and even more so for oil in a Covid-19 environment, as evidenced by the constant choppiness of price action this week.

Hints of any renewed downtrend in demand, practically driven by Covid-19 concerns, continue to send fear across the markets. As a consequence of tepid demand, we could see inventories remain elevated for some time.

The weakness in crude oil persists as the prospect of a fourth US stimulus package fades, but prices received some support from a draw in product stocks in the Department of Energy (DOE) data, which offset small crude build.

Hurricane Delta is still on track to hit the Gulf of Mexico this weekend, and about 30% of oil output has been shut down. However, Delta has been downgraded to a category two hurricane, lessening one of the current support pillars.

But in Norway, one of the oil workers’ unions said it would expand its strike from Thursday to include four more North Sea fields, for a total of 11 oil fields, unless a wage deal is reached. Around 330k barrels a day have already been lost to the strike, and this last move is expected to add about 170k more.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi