US stocks fell again overnight, giving up earlier gains, as investors scrubbed earnings reports and fretted over the latest squabbling by lawmakers on the US stimulus package.

US Treasury Secretary Mnuchin noted that despite some progress with Democrats on further fiscal support, the two sides remain ‘far apart’.

Higher VIX and higher US S&P Eminis are usually a toxic cocktail for stocks.

US election day volatility has not eased unless you squint tough. And despite reports of widening election polls, there is no strong evidence that markets are now pricing a faster election resolution.

There is a remarkable tendency for fear to build and volatility to rise about 3 to 5 weeks before events, even those that have been on the calendar for years.

We saw this with the Scottish referendum, Brexit, and the 2016 election, for example. So, it might be wise not to write off any shift lower as your usual temperamental market proclivities or risk-off vagaries.

Markets still have that sinking feeling, thanks to a combination of stalled vaccine trials (both Eli Lilly and J&J have paused their phase 3 trials), slowing macro, and the extent to which governments may have to renew social mobility restrictions to control the spread of the coronavirus continue to chill investor sentiment.

And more broadly, the market seems to have got a little ahead of itself in pricing in a pro fiscal, political landscape post-November the 3rd. It is all too telling that volatility continues to remain bid despite the run-up in some market pockets in the last number of weeks.

Asian markets may suffer the hangover effect from US stocks

Asian market could suffer the hangover effect from the US market this morning.

Mainland China was a touch lower on flattish volume with people pointing to Apple chain disappointment, but there was extraordinarily little surprising to most traders.

A more apropos risk to markets is that, with all that liquidity sloping around courtesy of central banks, have we created a bunch of corporate zombies? Pretty apt when you think about it as we are on the cusp of Halloween, which always offers up a trick or treat to the markets

US Fed’s vice chair still sounds optimistic

US Fed vice-chair Clarida’s comments illustrate why the Fed seems to have hit some communications confusion. He says GDP will not return to its pre-pandemic peak for another year, which seems quick with the market pricing in no rate hikes to 2025.

Recent data has been surprisingly strong, and there has been a broad rebound across all types of consumer goods and housing. US Fed chair Jerome Powell has seemingly looked to Clarida and Williams for views and backing in the past.

Neither seems especially keen on increasing accommodation. Hence, though Powell is warning about the dire economic consequences of a delay to stimulus spending, he does not get support from his two wingmen.

He is also going down the same route as many investors are when he makes a “when the vaccine arrives” comment. There is a growing assumption of a ‘eureka’ moment from the pharma industry, and a few weeks later, the whole planet will have been vaccinated and back to normal.

It is just tough to imagine a vaccine’s rollout into the general public anywhere near fast enough. It is hard to imagine any scenario in the near-term where travel gets back to pre-pandemic levels, and even with a vaccine in the pipeline (numerous actually), there are gnawing concerns that we are not in Kansas anymore, to quote Judy Garland.

Oil prices climb

Oil prices extended their gains after a surprising to consensus sharp draw in US crude stockpiles.

Linking the strong China data which is triggering a robust Yuan response and simultaneously strengthening other Asia colossal oil importer currencies (weakening the Dollar) and OPEC plus oil-producing allies, including Russia adhering to deep production cuts to counter the demand fallout caused by the coronavirus pandemic, there is a bullish step in the complex

Also, increased refinery activity in two of Asia colossal oil consumers, China, and India, has boosted global oil consumption bullishly for oil prices.

China’s money supply and credit growth surprised on the upside again in September, which in my view reflects robust credit demand from both the government and private sector on the back of the ongoing economic recovery.

Consumption is starting to kick in huge in China. While China cannot carry the oil recovery on its own, it can certainly go a long way to bridging the gap until the US stimulus triggers.

With coronavirus cases accelerating in many countries, the magic bullet could be if OPEC+ extends the current quotas into early 2021 rather than follow the scheduled ramp down of curtailments – this would help in normalising global inventories.

Oil tail risk

But the tail risk is how lawmakers deal with this Covid-19 surge and the way consumers interact remains the wild card.

While a return to draconian confinement measures is unlikely, the most prominent threat to the economic recovery is fear of the virus, not necessarily the soft lockdowns or social gathering restrictions.

It is fear that could keep people hunkered down until the curve flattens or the vaccine is available. And It could sound a significant downbeat to the economy.

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