The virus has found a new host
As Trump has now been diagnosed
And quickly transacted
More sales than buys as a riposte
While other news of some import
Explained that Lagarde’s come up short
Seems prices are static
Though she’s still dogmatic
Deflation, her ideas, will thwart
Tongues are wagging this morning after President Trump announced that he and First Lady Melania have tested positive for Covid-19. The immediate futures market response was for a sharp sell-off, with Dow futures falling nearly 500 points (~2%) in a matter of minutes. While they have since recouped part of those losses, they remain lower by 1.4% on the session. SPU’s are showing a similar decline while NASDAQ futures are down more than 2.2% at this time.
For anybody who thought that the stock markets would be comfortable in the event that the White House changes hands next month, this seems to contradict that theory. After all, what would be the concern here, other than the fact that President Trump would be incapacitated and unable to continue as president. As vice-president Pence is a relative unknown, except to those in Indiana, investors seem to be demonstrating a concern that Mr Trump’s absence would result in less favorable economic and financial conditions. Of course, at this time it is far too early to determine how this situation will evolve. While the President is 74 years old, and thus squarely in the high-risk age range for the disease, he also has access to, arguably, the best medical attention in the world and will be monitored quite closely. In the end, based on the stamina that he has shown throughout his tenure as president, I suspect he will make a full recovery. But stranger things have happened. It should be no shock that the other markets that reacted to the news aggressively were options markets, where implied volatility rose sharply as traders and investors realize that there is more potential for unexpected events, even before the election.
Meanwhile, away from the day’s surprising news we turn to what can only be considered the new normal news. Specifically, the Eurozone released its inflation data for September and, lo and behold, it was even lower than quite low expectations. Headline CPI printed at -0.3% while Core fell to a new all-time low level of 0.2%. Now I realize that most of you are unconcerned by this as ECB President Lagarde recently explained that the ECB was likely to follow the Fed and begin allowing inflation to run above target to offset periods when it was ‘too low’. And according to all those central bank PhD’s and their models, this will encourage businesses to borrow and invest more because they now know that rates will remain low for even longer. The fly in this ointment is that current expectations are already for rates to remain low for, essentially, ever, and business are still not willing to expand. While I continue to disagree with the entire inflation targeting framework, it seems it is becoming moot in Europe. The ECB has essentially demonstrated they have exactly zero influence on CPI. As to the market response to this news, the euro is marginally softer (-0.25%), but that was the case before the release. Arguably, given we are looking at a risk off session overall, that has been the driver today.
Finally, let’s turn to what is upcoming this morning, the NFP report along with the rest of the day’s data. Expectations are as follows:
|Average Hourly Earnings||0.2% (4.8% Y/Y)|
|Average Weekly Hours||34.6|
Once again, I will highlight that given the backward-looking nature of this data, the Initial Claims numbers seem a much more valuable indicator. Speaking of which, yesterday saw modestly better (lower) than expected outcomes for both Initial and Continuing Claims. Also, unlike the ECB, the Fed has a different inflation issue, although one they are certainly not willing to admit nor address at this time. For the fifth consecutive month, Core PCE surprised to the upside, printing yesterday at 1.6% and marching ever closer to their (symmetrical) target of 2.0%. Certainly, my personal observation on things I buy regularly at the supermarket, or when going out to eat, shows me that inflation is very real. Perhaps one day the Fed will recognize this too. Alas, I fear the idea of achieving a stagflationary outcome is quite real as growth seems destined to remain desultory while prices march ever onward.
A quick look at other markets shows that risk appetites are definitely waning today, which was the case even before the Trump Covid announcement. The Asian markets that were open (Nikkei -0.7%, Australia -1.4%) were all negative and the screen is all red for Europe as well. Right now, the DAX (-1.0%) is leading the way, but both the CAC (-0.9%) and FTSE 100 (-0.9%) are close on its heels. It should be no surprise that bond markets have caught a bid, with 10-year Treasury yields down 1.5 basis points and similar declines throughout European markets. In the end, though, these markets remain in very tight ranges as, while central banks seem to have little impact on the real economy or prices, they can manage their own bond markets.
Commodity prices are softer, with oil down more than $1.60/bbl or 4.5%, as both WTI and Brent Crude are back below $40/bbl. That hardly speaks to a strong recovery. Gold, on the other hand, has a modest bid, up 0.2%, after a more than 1% rally yesterday which took the barbarous relic back over $1900/oz.
And finally, to the dollar. This morning the risk scenario is playing out largely as expected with the dollar stronger against almost all its counterparts in both the G10 and EMG spaces. The only exceptions are JPY (+0.35%) which given its haven status is to be expected and GBP (+0.15%) which is a bit harder to discern. It seems that Boris is now scheduled to sit down with EU President Ursula von der Leyen tomorrow in order to see if they can agree to some broad principles regarding the Brexit negotiations which will allow a deal to finally be agreed. The market has taken this as quite a positive sign, and the pound was actually quite a bit higher (+0.5%) earlier in the session, although perhaps upon reflection, traders have begun to accept tomorrow’s date between the two may not solve all the problems.
As to the EMG bloc, it is essentially a clean sweep here with the dollar stronger across the board. The biggest loser is RUB (-1.4%) which is simply a response to oil’s sharp decline. But essentially all the markets in Asia that were open (MYR -0.3%, IDR -0.2%) fell while EEMEA is also on its back foot. We cannot forget MXN (-0.55%), which has become, perhaps, the best risk indicator around. It is extremely consistent with respect to its risk correlation, and likely has the highest beta to that as well.
And that’s really it for the day. The Trump story is not going to change in the short-term, although political commentators will try to make much hay with it, and so we will simply wait for the payroll data. But it will have to be REALLY good in order to change the risk feelings today, and I just don’t see that happening. Look for the dollar to maintain its strength, especially vs. the pound, which I expect will close the day with losses not gains.
Good luck, good weekend and stay safe