In the end, it proved to be a classic risk-off day off day in markets, although there was a solid bid in US equities in the last two hours, with the NAS100 having recovered off a session low of 10,677 to close 40bp in the green. But there has been movement and the commodity space has it in spades – the reflation trade has been called into question and tech has been the defensive play. JPY buyers have also been out of force and again re-enforces my view that the JPY remains one of the most attractive currencies around.

Without pressing too deeply into US politics, the passing of RDG has increased the perception that we won’t see fiscal stimulus this side of November – not a great vision for the future if we do end up getting a split Congress in November. EU banks were taken down in a big way, with the EU Stoxx banking sector losing 6.3% and where the daily chart suggests risks of a move into the floor seen between March and May. News that several banks were allegedly involved in illicit transfers for some two decades at the heart of that move, while a 5bp decline in EU 5y inflation swaps will never help bank equity either.

Renewed focus on lockdown restrictions both in the UK, which have been deemed to be at a ‘critical’ point and around Europe haven’t helped either – The FTSE and EU equity markets have been sold aggressively, with the DAX (-4.4%) having a 3.8 z-score move – that said, our calls for the open (if it were to happen now) are looking somewhat constructive and this obviously reflects the late-session rally in US stocks – My play on the GER30 is to wait for a move through 12,576 and I’ll be holding for 12,200 and the 200-day MA.

Comments from the former Food and Drug Administration Commissioner, Scott Gottlieb, that he expects the US to see out “at least one more cycle” won’t have helped sentiment either. If I look at a simple Covid-19 thematic basket (S&P500 hotels, airlines and casino’s) and look at this relative to the broader S&P500, there has been a sharp underperformance, which seems to have become a solid guide for where 10-year US Treasuries are headed – and COVID concerns have impacted the reflation trade, then it’s not hard to see why there’s been good buying in the long-end of the Treasury curve.

(Source: Bloomberg)

We’ve also inflation expectations falling quite sharply and therefore yields have moved 4bp higher in 5yr real Treasuries. There is little doubt, this has promoted short covering in the USD, where relative real rates matter for exchange rates, so the combination of a stronger USD and higher real yields has hit gold 2% – that said, gold has bounced off the session low of 1882, and held 1900 and the August range low with some determination. For gold bears, a close through 1900 seems important, after the break of the 50-day MA. I still want to see a break of 1973 to turn more bullish on the metal.

Silver has again fared worse, falling 7.6%, while crude has lost 3.6% as global economics are called into question. Copper and iron ore futures falling on a similar theme.

On the docket today, and by way of event risk, the only consideration from a data perspective is RBA’s Guy Debelle speech at 10:30aest, and this could lay out framework for any policy initiatives the RBA could utilize if needed going forward – I dont expect it to be a vol event, but its always prudent to watch AUD exposures around this point.

Published by Chris Weston, Head of Research, Pepperstone