In England and Scotland and Wales
The third quarter saw rising sales
But this quarter will
Repeat the standstill
Of Q2, with different details

In fact, worldwide what we have learned
(And why electees are concerned)
Is policy choices
That help certain voices
By others, are frequently spurned

Markets, writ large, continue to seek the next strong narrative to help generate enthusiasm for the next big move.  But for now, as we are past the ‘Blue wave is good’, and we are past ‘gridlock is good’, and we are past ‘the vaccine is here’, there seems precious little for investors to anticipate.  At least with any specificity.  And that is the key to a compelling narrative, it needs to have a plausible story, a rationale behind that story for the directional movement, but perhaps most importantly, it has to have a target that can be realized.  Whether that target is an announcement, a deadline or long-awaited policy speech, it needs an endgame.  And right now, there is no obvious endgame to drive the narrative.  With that in mind, it should not be very surprising that markets have lost their way.

So, let’s consider what we do know and try to anticipate potential impacts.  The UK Q3 GDP data this morning was of a piece with the US release two weeks ago, as well as what we saw for all the Eurozone nations that have reported, and what we are likely to see from Japan Sunday night; record breaking growth in the quarter, but growth insufficient to make up for the losses in Q2.  Of greater concern for governments everywhere is that Q4 is going to see a dramatic slowing, and in some nations, a return to negative output, due to the resumption of lockdowns throughout Europe as well as in some major US cities.

Economists and analysts seem to have an interesting take on this, essentially explaining that if Q4 turns out worse than previously forecast, it just means that Q1 of next year will be better.  No biggie!  But, of course, that is absurd, especially given the severity of the Covid recession’s impacts already.  After all, the loss of millions of small businesses around the world, and the concurrent loss of employment by those businesses workers is not something that can be quickly reversed.  While in the long term, entrepreneurs will almost certainly restart new businesses, there is a significant time lag between the two events.  And ironically, governments tend to make starting businesses very hard with regulations and licensing fees imposed on the would-be entrepreneur, thus restricting the very economic growth those same governments are desperate to rekindle.

It is this dynamic that has resulted in the need for massive fiscal support by governments worldwide and given the growth of the second wave of the virus, the demand request by central bankers for governments to do even more. The problem inherent in this dynamic is that government largesse is not actually free, despite ZIRP and NIRP.  The cost of further increases in government debt, which is already at record high ratio vs. GDP (>92% globally), is the reduced prospects for future growth.  The requirement to repay debt removes the capital available to invest in productive assets and businesses thus reducing the future pace of growth for everyone.

Up to this point, central banks have been able to absorb the bulk of that new issuance by printing money to do so, but that dynamic is also destined to fail over time.  Especially since it is a global phenomenon.  When only Japan, with debt/GDP >230%, was in this situation, it could rely on growth elsewhere in the world to absorb its exports and help service that debt.  But the global recession we saw in Q2 (>90% of the world was in recession) and are likely to see again in Q4 means that there will not be anybody else around to absorb those exports.  This is why every country is seeking a weaker currency, to help those exports, and remains a key reason that the dollar’s demise remains unlikely in the near future.  (This is also why there are a number of analysts who are anticipating a debt jubilee, where government debt owned by central banks will simply be torn up, leaving the cash in the system, but no bonds to repay.  While debt/GDP ratios will decline sharply, inflation will become the new bugbear.)

Of course, this is all in the future, and a lot to read out of UK GDP data, but this cycle has been pretty clear, and at this stage, even the hope for a vaccine to become widely available early next year is unlikely to change the immediate future.  Which brings us back to square one, a market searching for a narrative.

That lack of direction is clear across markets this morning, with equities mixed in Asia (Nikkei +0.7%, Hang Seng (-0.2%, Shanghai -0.1%), lower in Europe (DAX -0.8%, CAC -0.9%, FTSE -0.35%) and US futures split (DOW -0.4%, SPX -0.1%, NASDAQ +0.5%).  I’m not getting a sense of a strong narrative here at all.

Bond markets, meanwhile, are reversing some of their losses from earlier this week, with Treasuries (-3.3bps), Bunds (-1bp) and Gilts (-2.4bps) all firmer while the rest of Europe is also seeing demand for havens amid the modest equity weakness.  Oil prices are virtually unchanged this morning, holding onto their recent gains, but with no capacity to continue to rally.  Gold, on the other hand, has edged slightly higher, up 0.3%.

Finally, the dollar is truly mixed this morning with half the G10 currencies firmer, led by EUR (+0.25%) and CHF (+0.25%), and half weaker led by the pound’s 0.5% decline and AUD (-0.3%).  We already know why the pound is weak, their GDP data, while very strong on paper, disappointed relative to expectations.  As to the rest of the bloc, the truth is given the euro’s weakness yesterday, a little reversal ought to be no surprise.  EMG currencies show a similar split of half weaker and half stronger this morning. On the plus side, other than TRY (+1.2%) which continues to be roiled by the changes at the central bank, the gains are all modest and heavily focused on the CE4 currencies, which are simply following the euro higher.  On the downside, IDR (-0.6%) and KRW (-0.45%) are the weakest of the lot, with both these currencies seeming to see a bit of profit-taking from recent gains.

On the data front, we do get important numbers this morning, all at 8:30.  Initial Claims (exp 731K), Continuing Claims (6.825M) and CPI (1.3%, 1.7% ex food & energy) are on the docket with the first two still giving us our best real time data on economic activity.  Also, we cannot forget that Chairman Powell, along with Madame Lagarde and BOE Governor Bailey, will be speaking later this morning, at 11:45, at an ECB forum, with the outcome almost certainly to be a plea for fiscal stimulus by governments one and all.

In the end, the lack of a compelling narrative implies to me a lack of direction is in store.  As such, I expect little in the way of a resolution in the near future, and thus choppy dollar price action is the best bet.

Good luck and stay safe
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