The latest from 10 Downing Street
Is Boris is willing to meet
Midway twixt the stance
Of England and France
In order, the talks, to complete
Meanwhile, from the Far East we heard
That growth was strong in, quarter, third
They’re now set to be
The only country
Where year on year growth has occurred
The weekend has brought a few stories of note, all of them with bullish overtones, and so it should be no surprise that the week is starting with a risk-on tone. The first place to look is in China, which released its Q3 GDP data last night at a slightly worse than expected 4.9% Y/Y. While the market was looking for 5.5%, given that China is the first nation to achieve positive year over year growth, it was still seen as a market plus. At least to the broad market. Interestingly, the Shanghai stock market fell 0.7%. But, between the GDP data, Retail Sales rising 3.3% Y/Y and the Surveyed Jobless Rate falling a bit more than expected to 5.4%, the Chinese are painting a picture of a solid recovery. And while this is well below the levels seen prior to the pandemic, it is still well ahead of the rest of the world.
Next up is the UK, where optimism has grown that a Brexit deal will, in fact, be reached. Boris, playing to both his constituents and the Europeans, has said that the UK is preparing for a no-deal outcome, but is happy to continue to talk if the Europeans would consider some compromises. As well, in the House of Lords, word is they are prepared to remove the offending language from the UK government’s proposed Internal Market Bill, the one that caused all the concern since it was published in July. In this bill, the UK sets out the relationship between the four nations in the UK; England, Scotland, Wales and Northern Ireland. However, it was written in such a way as to render part of the Withdrawal Agreement moot, essentially overturning international law unilaterally. Hence the issue. In fact, the EU has sued the UK in the ICJ to prevent the law from being enacted. This has been a major sticking point for the EU and has undermined a great deal of trust between the two sides. Hence, the removal of that language is seen as a clear positive. Certainly, FX traders saw it that way as the pound has rallied 0.75% since the news first was reported and is now back to 1.30. While I believe the probability of a deal being completed remains above 50% (neither side wants a no-deal outcome), I also believe that the pound will fall after a deal is reached. Sell the news remains the most likely situation in my view.
Adding to these two positive stories, the never-ending US stimulus talks continue to garner headlines despite a distinct lack of progress. Yet, optimism on a stimulus bill seems to be a key driver in US equity markets, and in fact, in global ones as they are all, save Shanghai, propelled higher. Given the proximity to the election, it seems unlikely that either side will allow the other to have a political victory, and so I remain skeptical a deal will be reached soon. Of course, that merely means we can have a whole bunch of rallies on optimism that one will be reached!
With all that in mind, let’s take a look at the markets this morning. Aside from Shanghai’s negative outcome in Asia, we saw strength with the Nikkei (+1.1%) and Hang Seng (+0.65%) both rallying nicely. Europe as seen modest strength with the CAC (+0.6%) leading the way although the rest of the continent has seen far less love with the DAX (+0.1%), for instance, barely positive. In fact, as I write, the FTSE 100 is actually slightly lower, down -0.15%. US futures, though, have taken the stimulus story to heart and are much higher, between 0.8% (DOW) and 1.1% (NASDAQ).
Bond markets are feeling the risk-on mood as well, as they have fallen across the board with yields rising in every developed market. Treasury yields are higher by 3.2 basis points, while bunds have seen a more modest 1.2 basis point rise. Interestingly, the PIGS are seeing their bonds tossed overboard with an average rise of 4.5 basis points in their 10-year yields.
Oil prices (WTI -0.35%) are little changed, surprisingly, as one would expect commodities to rally on a positive risk day, while gold (+0.7%) and silver (+2.6%) are both quite strong, again somewhat surprising given higher yields and positive risk. There are still many market relationships which have broken down compared to long-term trends.
Finally, the dollar is under pressure across the board this morning, with every G10 currency higher led by NOK (+0.95%) despite oil’s decline. One of the drivers appears to be the unwinding of some large short positions in commodity currencies, a view that had been gaining credence amongst the leveraged community set. This has helped SEK (+0.6%) and NZD (+0.55%) today as well. The rest of the bloc, while higher, has been far less interesting.
On the EMG front, ZAR (+0.65%) is the leader with KRW (+0.5%) next in line. After that, the gains are far less significant. Korea’s won clearly benefitted from the Chinese GDP news, as China remains South Korea’s largest export destination. Meanwhile, any gain in gold is likely to help support the rand given the gold mining industry’s importance to the economy there. And as you consider the fact that the dollar is weak against virtually every currency, it is far more understandable that gold and silver have rallied as well.
On the data front, this week is not terribly interesting with only a handful of releases:
|Wednesday||Fed’s Beige Book|
|Existing Home Sales||6.30M|
However, despite a lack of data, there is no lack of Fedspeak this week, with six speeches just today, led by Chairman Powell at 8:00 on an IMF panel. One of the themes of this week seems to be the discussion of central bank digital currencies, an idea that seems to be gaining traction around the world. The other central bank tidbit comes from Madame Lagarde, who, not surprisingly, said she thought it made sense the PEPP (Pandemic EMERGENCY Purchase Program) be made a permanent vehicle. This is perfectly in keeping with central bank actions where policies implemented to address an emergency morph into permanent policy tools as central bank mandates expand. Once again, I will point out that the idea that other G10 central banks will allow the Fed to expand their balance sheet and undermine the dollar’s value without a response is categorically wrong. Every central bank will respond to additional Fed ease with their own package, thus this argument for a weaker dollar is extremely short-sighted.
But with all that said, there is no reason to believe the positive risk attitude will change today, unless there is a categorical denial by one of the parties discussing the stimulus bill. As such, look for the dollar to continue to slide on the session.
Good luck and stay safe