US stocks rallied to close higher for the first time in five sessions as big tech led the way, re-emerging as a haven alongside the US dollar.
Stock markets stabilised after a bout of volatility that had shaken investors’ confidence to the core on Monday as the S&P rose 1.1%, with smaller gains in Europe. The better sentiment came amid hand-wringing from US Federal Reserve speakers about the status of fiscal negotiations.
After the Monday melt-down across most global equities (ex-Tech), there is a temporary sense of calm enveloping the global stock markets.
But the question remains, heading into one of the most politically contentious elections of all time, is it S&P 500 3200 before 3400 or vice versa before mid-October.
Since the end of the day yesterday, with Nasdaq futures in the green, it indicates the tech sector’s resilience and provides an enduring go-to strategy through the Covid-19 shutdown trade.
Tech is outperforming, while cyclicals are lagging. Housing and Communication Services lead US equities higher. Covid-19 is less of a factor today – which makes sense considering the latest lockdown initiatives confirm governments across the globe are trying extremely hard to keep things open.
All in all, it feels like we are riding the ‘safe’ long Momentum/Tech trade again, for now.
Although central banks can do more, equity markets have likely reached their multiple policy deluges’ saturation point. And as such, the stock markets might continue to struggle to make new highs until there are more positive signs of real economic growth.
US dollar continues to trade higher
The broader markets have a minimal appetite for holding risk, and the dollar continues to trade higher. The AUDUSD is through .7175, the 55-day moving average, and the uptrend from June.
EURUSD is challenging the 1.1680-00 support band that has been held for the past quarter. Should risk appetite shift higher, look for currencies to follow in lockstep.
The Malaysian ringgit slipped a bit due to the strong US dollar, which is perceived as a safe- haven harbour in politically charged choppy seas. Given the significance of inflation to both BNM policy and bond inflows, the ringgit could trade tentatively ahead of this afternoon CPI release.
Yuan gaining favour?
FX market relationships come and go, and these days change almost weekly, but there has been a shift in sensitivity in recent months. While the broad USD still matters a lot for G10 currencies, the pull of the RMB is becoming stronger and may become a more powerful influence for G-10 over the next few months, especially for the AUD and the EUR.
Yuan traders will turn to the fix today for clues after the People’s Bank of China (PBoC) offered up a slightly weaker setting yesterday. The CNH continues to be the single largest short USD position in the EM complex for all the well-documented reasons, robust data, and FTSE inclusion.
However, the short USD/CNH positioning is now more stretched than at any time since the US-China’ trade wars started in 2018 and is closer to the extremes from September 2017, likely encouraged by the minimal nature of pushback from PBoC authorities.
Gold losses some shine
Gold has fallen out of favour; still, the downside may also be limited due to low yields and geopolitical and trade risks that are likely to provide a price floor.
The lack of a bounce after Monday’s drop is not encouraging. While gold does not look persuasive, there is a limit to how low it is likely to fall – at least ahead of a highly contentious US election, a climate of highly charged geopolitical risks, and renewed COVID-19 concerns.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp