US equities closed lower on Friday – a predictable response to the uncertainty brought about by news the US President had tested positive for coronavirus.

That news broke about halfway through the Asian trading session Friday, and in the context of the shocks seen this year, the financial market reaction appears so far to have remained relatively orderly.

One of the larger price reactions was oil – down 4.3%, though deeper concerns about persistent soft demand played a dominant role in that.

The only certainty is uncertainty

With just weeks ahead of the US election, the only certainty is the uncertainty of what lies ahead.

In the near term, the President’s health situation may increase the likelihood of a contested result and all the adverse knock-on effects in times of uncertainty and heightened volatility after polling day.

It does feel a bit strange weaving a constructive narrative for the week ahead, considering the circumstances. In essence: As long as President Trump is still fighting Covid-19, everything else is of secondary importance.

The health of the President will matter to both the polls and risk sentiment in general.

Some opinions are starting to emerge around possible bullish scenarios. A stimulus deal becomes more likely in the short term (good for oil).

House Speaker Nancy Pelosi will not want to be seen as holding up virus-related spending. She will lower her spending demand. And if Trump’s Covid-19 scare is a quick and mild case, he will likely get a positive bump in the polls.

However, a sympathy bump is very unlikely given his prior attitude on Covid-19 and the US’s death rate.

The market is searching for a new narrative. Regardless of the election outcome, the new President will be focused on getting the US back to full employment and fast.

In this modern monetary theory era, the narrative is likely to shift to increased deficit spending, higher long-end rates, and higher inflation expectations. These macro factors support could support cyclical stocks.

More bumpy ride ahead?

Still, it could be a bumpy ride as heightened volatility typically accompanies any new market regimes as old gamelans give way to updated strategies.

Traders could fumble in the dark between opinion polls, Trump’s health updates, and the next series of debates where the square-off between VP Pence and Biden’s running mate Kamela Harris could take on an added level of importance.

Oil markets

While President Trump is still in the hospital recovering, oil prices nudged higher at the open in Asia, tracking broader markets, after the President’s medical staff offered up an optimistic healthcare prognosis as this could give him a bump in the polls.

Prices bounced despite the US labour market weakness providing the latest blemish in the bullish for oil market narrative. There are still many hurdles to cross after an extremely challenging way to kick Q4 with no respite for the battered energy complex.

Gold still facing some headwinds

The markets maintain a favourable view of gold. Still, travel direction is unlikely to be a straightforward process dotted with periods yields backing up, and bouts haven strength should create headwinds along the way.

After gold initially surged on haven demand gold on Friday, bullion gave way to a stable dollar and as risk stabilised. Ostensibly the president testing positive for Covid-19 appears gold bullish, as it adds to uncertainty as we head into an election. Still, with the dollar holding firm, it lessens the appeal for gold.

Ultimately, how gold makes sense of the latest developments will be best viewed through the US dollars’ lens. EURUSD near term direction, given gold sensitivity to the cross, will likely hold the cards.

Currency Markets

There was almost no reaction to the US non-farm payroll data. Perhaps that makes sense, given that many traders seem to be sitting on their hands at the moment.

According to the latest positioning survey, the reduction of USD short positioning continues as the US election on Nov. 3 approaches, and the market takes a bit of a break from the risk-on tone at the beginning of September.

Despite the kneejerk USD rally on the President’s positive test last week, I believe the President’s news is clearly USD negative. It’s a matter of where you want to express that view. I’m sticking with the ASIA FX view.

The market bought USD because that is the current correlation regime (S&P down, USD up), but I think this will prove to be the wrong move over time.

Short USDJPY makes particular sense to me as it captures the increase in Biden’s win odds (more spending, MMT, etc.).

USDCNH shorts have been reduced. Only USDKRW and USDTWD positioning remained relatively unchanged from two weeks ago.

The markets should favour carry FX trades following a stable month-end supported by a large amount of excess USD liquidity, healthy funding levels and following the US Fed’s announcement extending dividends and buyback restrictions for banks past year-end.

On the ringgit, the bounce off the lows on oil and the favourable MGS bond carry vs. US Treasury could see the MYR trade a shade brighter today.

Euro on the defensive

The EUR has been trading on the defensive against the USD, JPY, and GBP as it faces local adverse factors, notably low inflation. Eurozone core inflation fell to 0.2% YoY in September from 0.4% (consensus 0.4%), a record low for the series.

British Pound outperforms

GBP is the out-performer, hoping that talks between PM Boris Johnson and European Commission President Ursula von der Leyen will break the Brexit negotiations’ deadlock.

The discussion appears to be taking on a higher level of decorum, and even with little sign of a real breakthrough, the market base case scenario for a deal to happen remains intact.

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