With spectacles all colored rose
Investors see only the pros
While cons may exist
They’ve all been dismissed
Thus, risk appetite only grows
It is good to be alive!! That seems to be the mantra in markets this morning as despite ongoing vote recounts in a number of states, the mainstream media have declared Joe Biden the winner of the election. This has unleashed a wave of buying (albeit not a blue wave) which has pushed both equity and commodity prices higher, as well as, interestingly enough, bond prices. While I rarely, if ever, quote from another organization’s research, I will make an exception today as I feel it encapsulates the mindset that appears to have taken hold. Citibank published a note over the weekend with the following: “..[the] trifecta of knowing who the next president will be, that the end of the pandemic is at hand and that sufficient economic stimulus will be available for the interim will mark the bright start of the New Economic Cycle in 2021.” Perhaps, reading this comment you may understand why I have become such a skeptic over time.
Let us deconstruct this trifecta. At this time, there are recounts in several key battleground states where the margin of victory was extremely narrow, including Pennsylvania, Nevada, Michigan and Georgia, and although the bulk of the media continue to claim this will not change the outcome, stranger things have happened. However, let us assume this is the case. The second leg is “the end of the pandemic is at hand”. This statement seems a bit disingenuous. Every day there is a headline about the rising number of cases worldwide, which have now topped 50 million since this began in March and are spiking rapidly into the second wave. In addition, we know that Europe has essentially closed down half its economy for the month of November. In the meantime, one of the forecast benefits of a Biden victory was a new, national and sensible approach to addressing the pandemic. It strikes me that if the end of the pandemic were at hand, the rise in new daily cases would be heading toward zero, or some extremely low number, certainly not the 472+K reported yesterday or 600K the day before, nor would there be a need for a new and sensible policy as the pandemic was already ending. Finally, with the presumed Republican majority in the Senate, and with Majority Leader McConnell having indicated that the next stimulus bill should not be more than $500 billion, either the definition of sufficient has changed (prior to the election the punditry insisted that at least $2 trillion was necessary), or more cynically, Citibank is simply talking their book, trying to encourage more investment and economic activity, especially utilizing their services.
However, it is clear that market participants are willing to accept that trifecta at face value, and so this morning, we are seeing a powerful risk rally across all asset classes. Starting with equity markets, which are clearly the drivers of risk sentiment, not only is my screen completely green, but powerfully so. Asia started the process with significant gains (Nikkei +2.1%, Hang Seng +1.2%, Shanghai +1.9%), and Europe has taken up the mantle with gusto (DAX +1.9%, CAC +1.6%, FTSE 100 +1.4%). Remember, all this positivity exists despite the fact that the Brexit negotiations remain quite far apart and ostensibly need to be completed by Sunday coming. But today, that is irrelevant. Lest you were concerned US markets were not participating, futures here are much higher as well (DOW and SPC +1.45%, NASDAQ +1.8%). In other words, all is right with the world.
The bond market’s behavior is far more interesting, however, although perhaps there is a cogent explanation. As we all know, a risk-on day, especially one as powerful as this, typically sees haven assets like government bonds sold off to free up capital to invest in stocks. But this morning, Treasury yields are lower by 1 basis point while European markets are seeing yield declines (price rises) of between 2 and 3 basis points (with Greek 10-year yields lower by 8 basis points.) While Greek yields make sense, after all their bonds are risk assets, not havens, it is surprising to see Bunds, OATS and Gilts rallying so much. Perhaps the rationale behind this movement is the belief that we are set to see an increase in QE, especially in Europe, as Madame Lagarde has made clear that the ECB is going to be doing more come the December meeting. The only concern with this thought process is that we have known that to be the case for two weeks, so why would these rallies suddenly pick up steam today?
Commodity markets are definitely feeling the love with oil rallying 3+% and both precious and base metals all higher on the day. In other words, optimism reigns here.
Finally, the dollar is under pressure against most of its counterparts in the EMG space this morning although is having a mixed performance versus the G10. Starting with the G10, perhaps the most surprising thing is that NOK (+0.15%) has gained so little given the strong rebound in oil. Instead, the Commonwealth currencies are the leaders, with NZD (+0.4%) on top followed by CAD and AUD (both +0.2%). All four of those currencies are beneficiaries of firmer commodity prices. Meanwhile, JPY (-0.45%) is the leading decliner, which in a risk-on scenario is just what would be expected. As well, weakness in CHF (-0.2%) is also no surprise. But the pound (-0.2%) is under a bit of pressure, and neither the euro (-0.1%) nor SEK (-0.2%) have been able to gain during this session, which is somewhat surprising, especially given Stockie’s high beta to risk assets.
In the Emerging markets, TRY (+5.5%) is far and away the big winner today after the central bank governor was replaced and the economics minister (Erdogan’s son-in-law) stepped down. It seems the market believes that the new central bank governor is going to raise rates to try to shore up the currency. After that, we have seen solid strength in IDR (+1.0%), MXN (+0.8%) and KRW (+0.65%), although the bulk of the bloc is somewhat higher. In the case of IDR, the rupiah has been the beneficiary of stock market inflows overnight with Korea’s won feeling the same sort of love. Of course, MXN benefits when oil rallies, as does RUB (+0.3%) just not that much today. In fact, the only red numbers come from the CE4 (HUF -0.5% with the others just marginally lower), and that only recently after the euro slid to a loss on the day.
On the data front, there is precious little released this week, with CPI the clear highlight.
|Tuesday||NFIB Small Biz Optimism||104.4|
|JOLT’s Job Openings||6.5M|
|CPI||0.2% (1.3% Y/Y)|
|-ex food & energy||0.2% (1.7% Y/Y)|
|Friday||PPI||0.2% (0.4% Y/Y)|
|-ex food & energy||0.2% (1.2% Y/Y)|
However, while there may not be much data of note, we do get to hear from loads more Fed speakers this week, with thirteen different events, although only nine different speakers (Dallas’s Kaplan will be hoarse after his four different speeches). One of these, though, on Thursday, will be Chairman Powell at the ECB Forum, where we will also hear from Madame Lagarde and the BOE Governor Andrew Bailey.
Breaking news just hit the tape about a Pfizer vaccine that was quite efficacious and that has encouraged even more risk taking, so equities are even stronger. At this stage, there is nothing to stop the risk rally, and thus, nothing to help the dollar today. While it won’t collapse, it will likely remain under pressure all day.
Good luck and stay safe