With stimulus hopes quickly fading
And Covid, more countries pervading
Most risk appetites
Have been read last rites
Thus traders, to buy, need persuading

Well, yesterday was no fun, at least if you owned equities in your portfolio, as we saw sharp declines throughout European and US markets.  And frankly, today is not shaping up to be much better.  Risk assets are still being jettisoned around the world as investors run to havens.  Perhaps the only place this is not true is China, where recent data releases show the economy there moving back toward trend growth.  The question at hand, then, seems to be, Is this the beginning of the widely anticipated sell-off/correction?  Or is this simply a short-term blip in an otherwise strong uptrend in risk asset pricing?

Evidence on the side of the broader sell-off comes in the form of; a) the lack of a stimulus bill, which seems officially impossible before the election, and to which may hopes were pinned; and b) the increasing spread of Covid-19, forcing governments worldwide to reimpose restrictions on dining, drinking and many in-person services.  Without the stimulus to offset the economic activity that is being halted, the prospects of economic growth are fading quickly.  And unless the Fed or ECB starts to give money directly to citizens, rather than simply purchase securities, there is very little either one can do to prevent a more serious economic downturn.

Worryingly, the evidence for the short-term blip thesis is entirely technical, as yesterday’s price action halted at a key trend line, thus did not ‘officially’ break lower.  Certainly, it is exceedingly difficult to find a good reason to believe that, after a remarkable runup since the March lows, there is much left in the tank of this rally.  On what basis does one become bullish from here?  After all, the hopes for stimulus have been dashed, at least in the near-term.  Hopes for a vaccine have taken a back seat as well, with much less discussion as numerous candidates continue to go through phase 2 and 3 trials, but nothing has been approved.  The problem with the hopes for a vaccine being approved quickly is that a key part of the approval process is to ensure that there are no long-term side effects for those that prove efficacious.  And that simply takes time and cannot be accelerated.

Meanwhile, as the US election nears, investors appear to be taking their cues from the polls and expectations for a Biden victory are growing.  It is interesting to me that given the Democratic platform of higher taxes, more government intrusion into the economy and an attack on the mega-cap tech companies with an eye toward breaking them up, that investors believe a Blue wave will be positive for equities.  It seems to me, all of those would be decidedly negative outcomes for shareholders as we would transition from one of the most openly business-friendly presidencies to what, on the surface, would shape up as one of the least business-friendly administrations.  Yet, nearly everything that has been published, or at least that I have seen, comes down on the side of a Biden victory as being positive for risk assets.  While this appears to be entirely on the strength of expectations for a massive new stimulus bill, for an institution that prides itself on its forward-looking abilities, one would think the negatives of even larger increases in the budget deficit and the public debt required to fund those, would be recognized as distinctly negative.

But for now, the narrative remains if the polls are correct, risk assets will perform well, the yield curve will steepen, and the dollar will decline.  While I would argue the first two are unlikely, the dollar’s behavior will depend on what happens elsewhere in the world, thus seems impossible to call at this time.

And that seems to be the state of play this morning.  So, let’s take a look around markets at this hour.  Overnight equity action saw a mixed bag with the Nikkei essentially unchanged, the Hang Seng (-0.5%) softening and Shanghai (+0.1%) marginally higher.  As an aside, Australia’s ASX 200 fell 1.7%, despite the relatively positive news about China.  In Europe, while the FTSE 100 is back to flat on the session, the Continent remains under water led by the CAC (-1.0%) but with solid declines elsewhere (DAX -0.4%, Italy’s MIB -0.55%).  These readings, though, are actually better than from earlier in the session.  Finally, US futures have also improved in the past hour and are now pointing higher by roughly 0.5%.

Bond markets are showing modest risk-off tendencies this morning, at least throughout Europe, with Bund yields lower by 1bp, as are French OAT’s.  Treasuries, on the other hand are unchanged in the session, trading right at 0.80%, which represents about a 7-basis point decline (bond rally) from last week’s levels.  There remains a huge amount of sentiment that the yield curve is going to steepen dramatically after the election as traders and investors anticipate a tsunami of bond issuance to fund the new Administration’s platform.  Of course, if the polls prove to be wrong, as they were in 2016, my sense is we could see a very sharp bond rally as the record short interest in bond futures gets quickly unwound.

Commodity prices, which yesterday were under pressure, and have seen oil trade well back below the $40/bbl level, are bouncing this morning, up ~1.0%, but looking through the rest of the complex, in base metals and ags, movement has been very modest and is mixed.

Finally, the dollar has turned from a dull opening, to some modest weakness overall.  NOK (+0.65%) is leading the way higher in the G10 space as it benefits from oil’s bounce.  However, after that, CAD (+0.3%) is the next biggest mover, also being helped by oil, and the rest of the bloc is +/- 0.2%, with no real stories to tell.  The pound, which has really done very little this month, continues to be whipsawed by Brexit headlines, although there is some positivity as both sides are meeting right now in London.

Emerging market currencies have two outliers this morning, ZAR (+0.75%) and TRY (-0.8%), with the rest of the bloc +/- 0.2% and very little of news to discuss.  If I had to characterize the market, it would be slightly dollar bearish, but in truth, the modesty of movement makes any judgement hard to offer.  As to the big movers, Turkey’s lira continues to suffer (-3.5% this week) as investors flee the country amid concerns the central bank has completely lost control of markets there, while President Erdogan continues his war of words with Europe and feels the sting of further sanctions.  On the flipside, ZAR is actually the leading gainer in the past week, as well as today, with hopes for positive budget news bolstering the demand for very high real yields.

Data today brings Durable Goods (exp 0.5%, 0.4% ex transport), Case Shiller Home Prices (4.20%) and Consumer Confidence (102.0).  With the Fed meeting next week, we have entered into the quiet period, so will not be hearing them castigate Congress for failing to pass a spending bill, although they all will be thinking it!  Across the pond, the ECB meets Thursday, and analysts are anticipating a strong signal that the ECB is going to increase monetary ease in December, yet another reason to be suspect of the collapsing dollar theory.  As for today, if the bulls can get the upper hand, then the dollar’s modest retreat thus far today can certainly extend.  But I don’t really see that happening, and think we see a bit of dollar strength before the session ends.

Good luck and stay safe
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