All Colored Rose

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
Thursday Initial Claims 730K
Continuing Claims 6.75M
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)
Michigan Sentiment 81.8

Source: Bloomberg

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
Adf

Haven’t a Doubt

The Fed, yesterday, made the case
That fiscal support they’d embrace
But even without
They haven’t a doubt
The dollar they still can debase
Their toolbox can help growth keep pace

As of yet, there is no winner declared in the Presidential election, although it seems to be trending toward a Biden victory.  The Senate, as well, remains in doubt, although is still assumed, at least by the market, to be held by the Republicans.  But as we discussed yesterday, the narrative has been able to shift from a blue wave is good for stocks to gridlock is good for stocks.  And essentially, that remains the situation because the Fed continues to support the market.

With this in mind, yesterday’s FOMC meeting was the market focus all afternoon.  However, the reality is we didn’t really learn too much that was new.  While universal expectations were for policy to remain unchanged, and they were, Chairman Powell discussed two things in the press conference; the need for fiscal stimulus from the government as quickly as possible; and the composition of their QE program.  Certainly, given all we have heard from Powell, as well as the other FOMC members over the past months, it is not surprising that he continues to plea for a fiscal response from Congress.  As I have written before, they clearly recognize that their toolkit has basically done all it can for the economy, although it can still support stock and bond markets.

It is a bit more interesting that Powell was as forthright regarding the discussion on the nature of the current asset purchase program, meaning both the size of purchases and the tenor of the bonds they are buying.  Currently, they remain focused on short-term Treasuries rather than buying all along the curve.  Their argument is that their purchases are doing a fine job of maintaining low interest rates throughout the Treasury market.  However, it seems that this question was the big one during the meeting, as clearly there are some advocates for extending the tenor of purchases, which would be akin to yield curve control.  The fact that this has been such an important topic internally, and the fact that the erstwhile monetary hawks are on board, or seem to be, implies that we could see a change to longer term purchases in December, especially if no new fiscal stimulus bill is enacted and the data starts to turn back lower.  This may well be the only way that the Fed can ease policy further, given their (well-founded) reluctance to consider negative interest rates.  If this is the case, it would certainly work against the dollar in the near-term, at least until we heard the responses from the other central banks.

But that was yesterday.  The Friday session started off in Asia with limited movement.  While the Nikkei (+0.9%) managed to continue to rally, both the Hang Seng (+0.1%) and Shanghai (-0.25%) had much less interesting performances.  Europe, on the other hand, started off with a serious bout of profit taking, as early on, both the DAX and CAC had fallen about 1.5%.  But in the past two hours, they have clawed back around half of those losses to where the DAX (-0.9%) and CAC (-0.6%) are lower but still within spitting distance of their recent highs.  US futures have shown similar behavior, having been lower by between 1.5% and 2.0% earlier in the session, and now showing losses of just 0.5% across the board.  One cannot be surprised that there was some profit taking as the gains in markets this week have been extraordinary, with the S&P up more than 8% heading into today, the NASDAQ more than 9% and even the DAX and CAC up by similar amounts.

The Treasury rally, too, has stalled this morning with the 10-year yield one basis point higher, although we are seeing continued buying interest throughout European markets, especially in the PIGS, where ongoing ECB support is the most important.  Helping the bond market cause has been the continued disappointment in European data, where for example, German IP was released at a worse than expected -7.3%Y/Y this morning.  Given the increasingly rapid spread of Covid infections throughout Europe, with more than 300K new infections reported yesterday, and the fact that essentially every nation in the EU is going back on lockdown for the month of November, it can be no surprise that bond yields here are falling.  Prospects for growth and inflation remain bleak and all the ECB can do is buy more bonds.

On the commodity front, oil is slipping again today, down around 3% as the twin concerns of weaker growth and potentially more supply from OPEC+ weigh on the market.  Gold however, had a monster day yesterday, rallying 2.5%, and is continuing this morning, up another 0.3%.  This is one market that I believe has much further to run.

Finally, looking at the dollar, it is definitely under pressure overall, although there are some underperformers as well.  For instance, in the G10, SEK (+0.6%), CHF (+0.5%) and NOK (+0.5%) are all nicely higher with NOK being the biggest surprise given the decline in oil prices.  The euro, too, is performing well, higher by 0.45% as I type.  Arguably, this is a response to the idea that Powell’s discussion of buying longer tenors is a precursor to that activity, thus easier money in the US.  However, the Commonwealth currencies are all a bit softer this morning, led by AUD (-0.15%) which also looks a lot like a profit-taking move, given Aussie’s 4.2% gain so far this week.

In the emerging markets, APAC currencies were all the rage overnight, led by IDR (+1.2%) and THB (+0.95%) with both currencies the beneficiaries of an increase in investment inflows to their respective bond markets.  But we are also seeing the CE4 perform well this morning, which given the euro’s strength, should be no surprise at all.  On the flipside, TRY (-1.2%) continues to be the worst performing currency in the world, as its combination of monetary policy and international gamesmanship is encouraging investors to flee as quickly as possible.  The other losers are RUB (-0.5%) and MXN (-0.3%), both of which are clearly feeling the heat from oil’s decline.

This morning, we get the payroll data, which given everything else that is ongoing, just doesn’t seem as important as usual.  However, here is what the market is looking for:

Nonfarm Payrolls 593K
Private Payrolls 685K
Manufacturing Payrolls 55K
Unemployment Rate 7.6%
Average Hourly Earnings 0.2% (4.5% Y/Y)
Average Weekly Hours 34.7
Participation Rate 61.5%

Source: Bloomberg

You may recall that the ADP number was much weaker than expected, although it was buried under the election news wave.  I fear we are going to see a decline in this data as the Initial Claims data continues its excruciatingly slow decline and we continue to hear about more layoffs.  The question is, will the market care?  And the answer is, I think this is a situation where bad news will be good as it will be assumed the Fed will be that much more aggressive.

As such, it seems like another day with dollar underperformance is in our future.

Good luck, good weekend and stay safe
Adf

Most Pundits Agree

No matter what skeptics might say
The Old Lady didn’t delay
They boosted QE
So, Sunak, Rishi
Can spend more each night and each day

But here, when the FOMC
Meets later, most pundits agree
They will not arrange
A policy change
Instead, for more fiscal they’ll plea

As markets are wont to do, they have effectively moved beyond the uncertainty of the US election outcome to the next big thing, in this case central bank activity.  You may recall that on Tuesday morning we learned the RBA cut interest rates again, down to 0.10% and installed a QE program of A$100 billion.  And while these days, A$100 billion may not seem like much, it does represent more than 5% of the Australian economy.  Of course, that action was mostly lost in the election fever that gripped markets at that time.  However, that fever has broken, and the market has come to terms with the fact there is no blue wave.  This has forced participants to collectively create a new narrative which seems to go as follows: gridlock in the US is good for markets because the Fed will be required to do even more, and thus monetary policy will remain easy for an even longer time.  This, as well as the expected lack of a massive stimulus package, is the driver behind the Treasury rally, which is continuing this morning as 10-year yields have fallen a further 3 basis points (30-year yields have fallen even more as the curve continues to flatten.)

Helping along the new narrative, and right on cue, the Bank of England stepped in and increased their QE program by a more than expected £150 billion this morning, allowing Chancellor of the Exchequer, Rishi Sunak, the leeway to expand fiscal support for the economy as the government there imposes a month long lockdown to try to arrest the spread of Covid-19.  Thus, in the UK, the monetary and fiscal policies are aligned in their efforts to prevent an economic collapse while fighting the effects of Covid.  Naturally, markets have voted in favor of further central bank largesse, and as expectations grow for even more support to come, equity investors are buying as quickly as they can.

Which leads us to the FOMC meeting today.  Cagily, they arranged for this meeting to be two days after the election, as they clearly don’t want to become the big story.  Rather, I’m certain that despite each members’ penchant to speak constantly, this is one time they will be as quiet as possible.  Part of this is due to the fact that there is exactly zero expectation that there will be any change in policy.  Rates are already at the effective lower bound, and thus far the Fed has not been willing to countenance the idea of negative rates.  Not only that, their forward guidance has been clear that rates will not be ‘normalized’ until at least 2023, and then, only if it makes sense to do so.  As to QE, they are already engaged in an unbounded program, purchasing $80 billion of Treasuries and $40 billion of Mortgage-backed securities each month.  Certainly, they could increase those numbers, but given the US Treasury has just significantly revised their expected issuance lower, (given the lack of a stimulus bill to fund), the Fed is already scooping up a huge percentage of the paper that exists.  With all that in place, what more can they do?  After all, if they say they won’t raise rates until 2024, will that actually matter?  I think not.  Instead, the one thing on which we can count is that the Statement, and Chairman Powell in the press conference, will repeat the point that more fiscal stimulus is what is needed.

The upshot is that, the most important par of the election outcome, is with regards to the Senate, which while it seems clear the Republicans have held their majority, could possibly turn blue.  But unless that happens, at this stage, the market has clearly turned its attention beyond the election and is voting favorably for more central bank support.  So, let’s see how things are behaving this morning.

After a strong US rally yesterday, especially in the NASDAQ, Asia took the baton and sprinted ahead as well with the Nikkei (+1.7%), Hang Seng (+3.25%) and Shanghai (+1.3%) all having strong sessions.  In fact, as I look through every APAC market, only Vietnam and Laos had negative days, otherwise every Asian nation rallied across every one of their indices.  Europe is no different, with every market in the green (DAX +1.7%, CAC +1.25%, FTSE 100 +0.5%, as well as all the sundry others), and US futures (DOW +1.4%, SPX +1.9%, NASDAQ +2.6%) are pointing to another big day here.

Bonds, as mentioned above, are also still feeling the love as only the UK appears to be adding to the fiscal mix and so central bank support will continue to drive activity until that changes.  This means that while Bunds, OATS and Gilts are all only marginally changed, the PIGS are seeing substantial demand with yields falling 3 basis points for all of them

Gold is doing well, up $15/oz on what seems to be the idea that fiat currencies will continuously be devalued and so something else will serve as a better store of value.  (Bitcoin, by the way, is also rallying sharply, +5% this morning, as many continue to see it as an alternative to gold.)  Oil, on the other hand, is a bit lower this morning, -1.0%, although that is after having rallied nearly 16% so far this week, so a modest correction doesn’t seem out of order.

Finally, the big loser today has been the dollar, which is weaker vs. essentially every other currency.  In the G10, NOK (+1.1%) is the leader, despite the fact that oil is correcting.  More interestingly, EUR (+0.7%) is rallying despite the fact that there is no expectation for Fed activity, and the relative stances of the Fed and ECB remains unchanged.  Now if there is not going to be a blue wave, and therefore no massive fiscal expansion in the US, I’m at a loss as to why the dollar should be sold.  Today, however, selling dollars is the story.

The same is true in the EMG bloc, with RUB (+2.2%) the runaway leader, but 1% or greater gains seen throughout EMEA and LATAM currencies.  Even IDR (+1.3%) which last night posted worse than expected GDP growth, has seen strength.  As long as the narrative continues to be that election uncertainty is a dollar negative, it appears the dollar has further to fall.  That said, I see no cause for a collapse of any type.

Aside from the FOMC today, we see some data as follows: Initial Claims (exp 735K), Continuing Claims (7.2M), Nonfarm Productivity (5.6%) and Unit Labor Costs (-11.0%).  Yesterday, amidst the election discussion, we missed the fact that ADP Employment rose a much less than expected 365K, and the ISM Services number printed at a worse than expected 56.6.  Perhaps, belatedly, that negative news has been impacting the dollar.  But my sense is this is narrative driven and unless the Fed truly shocks one and all, I expect the dollar can drift lower still for the rest of the session.

Good luck and stay safe
Adf

Hopes are now Dashed

Psephologists took a great hit
Their forecasts turned out to be sh*t
The blue wave has crashed
And hopes are now dashed
For Congress, more cash to commit

An astrologer, and economist and a psephologist walk into a bar
“What’s it going to be?” asks the barkeep.
“We have no idea,” they reply

While the final results of the Presidential race are not yet in, nor seem likely to be known before Friday at the earliest, what has become clear is that the Republican party is very likely to retain control of the Senate, no matter what, and that the Democratic majority in the House of Representatives has shrunk.  In other words, the idea of the blue wave, where the Democrats would not merely win the presidency, but retake the Senate and expand their control of the House has been crushed.  And with that outcome, the reflation trade that had gained so many adherents of late, is being quickly unwound.

Thus, the election results have spawned both a bull flattening of the yield curve, with 10-year yields currently lower by 11.5 basis points, while 30-year yields are 13 basis points lower and a dollar rebound, especially against most emerging market currencies.  It had seemed odd yesterday to see such significant market movement ahead of the results of what many expected to be a close, and possibly contested, election.  But clearly, there was a significant amount of enthusiasm for that mythical blue wave.

Until the Presidential results are declared, it will be extremely difficult to focus on US economic issues, as in fairness, given the diametrically opposed platforms of the two candidates, we can only surmise a future path once we know who wins.  As such, I expect the two stories that will dominate for the rest of the week will be the election results and the ongoing covid inspired lockdowns throughout Europe.

As this is not a political discussion, let us turn to the other major storyline.  As of today, it appears that Germany, France, Italy and the UK are all imposing significant restrictions on most, if not all, of their citizens for the entire month of November.  Given the rapid spread of the virus in this wave, Europe reported another 239K new cases yesterday, it is understandable that governments feel the need to act.  However, the balance between trying to maintain economic activity and trying to avoid spending so much money on healthcare save citizens’ lives is a difficult one to maintain.  After all, the EU has very strict guidelines as to what type of budget deficits its members can run, and at this point, every member is over the limit.  It is this reason that Madame Lagarde has been so clear that the ECB can, and will, do more to support the economy.  If they don’t, things will get ugly very quickly.  It is also this reason that leads me to believe the euro has limited upside for the foreseeable future.  Whatever is happening in the US, the situation in Europe is not one that inspires confidence.

Thus, let’s look at how markets are responding to the incomplete election results and the increase in Covid infections.  Equities in Asia had a mixed session, with the Nikkei (+1.7%) performing well while the Hang Seng (-0.2%) suffered on the back of the Ant Financial story.  (This story revolves around the expected IPO of the Chinese company, which was forecast to be the largest of the year, but which the Chinese government squashed.)  Shanghai equities were little changed on the session, up just 0.2%.  Europe, however, has seen early gains evaporate and at this point could best be characterized as mixed.  The DAX (-0.1%) is the laggard, while the CAC and FTSE 100 (+0.2% each) are marginally higher.  However, Spain’s IBEX (-1.1%) is feeling the pain of the lockdowns, as is Italy’s MIB (-0.25%).  US futures are quite interesting at this point, with DOW futures actually lower by 0.1%, while NASDAQ futures are 2.0% higher.  And NASDAQ futures were as much as 4.5% higher earlier in the session.  It seems that the status quo in US politics is deemed a positive for the Tech mega caps, while the cyclical companies are expected to have a much tougher time.  As well, if President Trump wins, there will be no expectation of significant tax hikes, something that would have been a virtual certainty with a President Biden.

As discussed above, Treasuries are rallying fiercely.  But we are seeing rallies throughout Europe as well, with Gilt yields leading the way, having fallen by 4.3 bps, but most of the continent looking at 2bp declines.  This appears to be either position unwinding or a renewed enthusiasm that the ECB is going to step up in a massive way next month.  Recall, yesterday, bonds fell everywhere, so a rebound is not that surprising, especially for those who were selling based on the moves in the US.  However, I suspect that given the newest lockdown announcements, investors have become increasingly convinced that the ECB is going to get perilously close to the idea of direct funding of government deficits, something that is verboten within the rules, but something that is desperately needed by the likes of Italy, Spain and Greece.

As to the dollar, yesterday’s sharp decline was puzzling for the same reason the bond market sell-off was puzzling, and so, this morning’s rebound makes perfect sense.  While earlier in the session, the dollar had seen much sharper gains, at this hour (6:52am), those gains are fairly modest.  AUD (-0.4%) is the worst G10 performer, followed closely by GBP (-0.35%) and NZD (-0.35%).  Meanwhile, both haven currencies, CHF and JPY have climbed back to unchanged on the day from earlier session losses.  With the election news still roiling markets, it is nonsensical to try to attribute these moves to anything other than position moves.

EMG currencies are also under pressure virtually across the board, and like the G10, the early declines, which in some cases were quite substantial have abated.  For instance, MXN (-4.1% last night, -1.0% now) showed the most volatility, but CNY (-1.0% last night, unchanged now) also saw substantial movement.  Again, to attribute this, or any currency movement, to anything other than position adjustment in the wake of the US election results would be a mistake.

As to the data today, the Services PMI data was released throughout Europe and was pretty much as expected.  ISM Services (exp 57.5) is out at 10:00 and expected to continue to show surprising growth.  Before that, we see the Trade Balance (exp -$63.9B), but trade policy is just not of interest these days.

Rather, the market will remain enthralled with the election results, which as I type remain decidedly unclear.  Either candidate could win the key remaining states of Pennsylvania, Michigan and Georgia, although all three are trending Trump right now.

In the end, the election result will matter because it will inform policy ideas.  If we remain status quo ante, the dollar likely has further to rise.  If Mr Biden emerges victorious, the dollar could certainly cede its recent gains, but no collapse is in sight.

Good luck and stay safe
Adf

Votes in the States

The second wave’s not the infection
Nor, either, is it the election
Instead, central banks
Will fire more blanks
As each makes a massive injection

But meantime, the world now awaits
The outcome from votes in the States
Most polls point toward Blue
Which many construe
As time to add risk to their plates

Election day has finally arrived, and the market is positively giddy over the prospects, or at least so it seems.  Equity markets worldwide are rising dramatically, haven assets are selling off, so Treasuries and bunds have fallen, and the dollar is under pressure versus every currency except the Turkish lira.  Most polls continue to point to a Biden victory, although there are several, interestsingly those that predicted Trump’s victory four years ago, calling for him to be reelected.  It is interesting that risk is being acquired so aggressively at this time given a key part of the narrative has been the relatively high probability of a contested election with no winner declared for weeks, if not longer driving major uncertainty in markets.  In addition, several big cities have been taking precautions against anticipated violence and rioting, with storefronts being boarded up and additional police called to duty.  Again, that hardly seems like a signal to be adding risk, but then this is the 2020’s, when everything you thought you knew turns out to have been wrong.

I guess the real question is, can the risk rally be sustained?  Well, if central banks have anything to say on the subject, and clearly they will try, the answer is a qualified yes.  Qualified because the longevity of the rally is still subject to debate.

While we all know that both the Fed and Bank of England will be meeting on Thursday, last night we got our first central bank meeting of the week, when the RBA convened Down Under.  As was widely expected, they cut their Cash Rate Target to 0.10% and they lowered the yield target on 3-year government bonds to 0.10% (that is their yield curve control program) but they also surprised the market by expanding their QE by A$100 billion.  This last is in addition to their unlimited purchases to maintain the 3-year rate at 0.10%.  The market response was quite positive, but it’s not clear whether that would have happened regardless, or whether it was dependent on the RBA’s actions.  But whatever the case, the ASX 200 rose 1.9% and AUD rose more than a penny and is higher by 0.9% at this hour.

But what of the rest of the world?  Why is risk being gobbled up so aggressively today?  For instance, despite a complete lack of new data from Europe, we are seeing broad-based strength in Continental equity markets.  The DAX (+1.75%), the CAC (+2.0%) and the FTSE 100 (+1.65%) are all firmly in the green, as are every other Eurozone market.  Perhaps they are continuing to react to last week’s ECB meeting where Madame Lagarde promised to “recalibrate” ECB policy in order to do more.  In other words, the creativity of central bankers will be on full display.  Consider, right now, all they can do is print money and buy bonds.  Perhaps they will start to buy other assets (equities anyone?), or perhaps, the frequently discussed digital euro will be announced, with every Eurozone citizen eligible to open an account at the central bank that will be replenished with cash funds regularly.  Or is it simply the European asset management crowd voting that if the polls are correct, the economy will recover quickly?  While there is no obvious catalyst, market sentiment has turned quite positive this week, especially after last week’s doom and gloom.

But it’s not just Europe.  We saw strength in Asia (Nikkei +1.4%, Hang Seng +2.0%, Shanghai +1.4%) and US futures are rocking as well with DOW (+1.5%) leading the way, though both the SPX (+1.2%) and NASDAQ (+0.75%) remain firmly positive.  Again, other than the RBA news, there was nothing out of Asia, and of course it is far too early to have anything from the US.  In fairness, yesterday did see a blowout ISM number 59.3 vs. 56.0 expected, so the data in the US continues to be impressive.  But it beggars belief that equities are rallying today based on that information.  In the end, it remains all about the election.

One thing that we have seen really build up lately is the view that the US yield curve is going to steepen dramatically.  That is evident in the record short position in long bond futures in Chicago (>260K), as well as the massive outflows the from ETF’s TLT and LQD, the biggest government bond and IG corporate bond ETF’s respectively.  The view seems to be that regardless of who wins the election, the US is going to see higher interest rates in the back end as the massive amount of Treasury issuance that will be required to fund the growing budget deficit will overwhelm the market.  And that makes perfect sense.  Of course, making sense and making money are two very different things.  If the market is excessively skewed in one direction in anticipation of an event, it is the very definition of the ‘buy the rumor, sell the news’ set-up that happens time and again.  My take here is that while a year from now, we may well see much higher Treasury yields in the 30-year, that will not be the first move once the election is over.  Not only will the Fed have something to say on the subject, but positions will get stale and unwound, and we could easily see a significant Treasury rally, especially if the economy falters.

One last thing to mention is the oil market, which saw a massive rebound yesterday on the story that the OPEC+ production cuts are likely to remain in place, rather than their expected ending.  In the end, oil prices remain a function of supply and demand, and any economic growth, for now, will still require oil.  The future may well be renewables, but in this case, the future is quite a few years away.

But that is really the story heading into the election.  It is surprising to me that we have seen as much movement as we have this morning, but since election results won’t be released until 7:00pm Eastern time, today is no different than yesterday in terms of new information.  I sincerely doubt that Factory Orders (exp 1.0%) are going to change any views, and given the Fed meeting Thursday, we still have silence from the FOMC.  While I would not fight the tape today, I still do not see the appeal of a short dollar position for the medium term.

Good luck and stay safe
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Remarkable

The week ahead’s certain to be
Remarkable, as we shall see
Election reports
More Fedspeak, of sorts
And data on jobs finally

There should be no lack of excitement this week as (hopefully) the election season finally winds down and we can all try to begin planning for the next four years of policy.  At this point, most of the polls continue to show there will be a change in the White House, with a fair number of polls predicting a blue wave, where the Democrats retake the Senate, as well as the Presidency.  The thing about pollsters is they are very much like economists; they take the data they want and extrapolate the information in a linear fashion going forward.  The problem with this approach, both for economists and psephologists, is that very little about life or the human condition is linear.  If anything, my observation is that life is quite cyclical, with the key being to determine when the cycle is changing.  As Yogi Berra is reputed to have said, “it’s tough to make predictions, especially about the future.”  But predictions galore are certainly being made these days.

For our purposes, however, it is important to continue to game out the potential outcomes, and for hedgers, ensure that proper hedge protection is in place.  Regarding fiscal policy, it seems quite clear that a blue wave will usher in unprecedented levels of additional fiscal stimulus, with numbers of $3 trillion – $5 trillion being bandied about.  If the status quo remains, with President Trump being reelected and the Senate remaining in Republican control, I expect a much smaller stimulus bill, something on the order of the $1.8 trillion that had been discussed up until last week.  Finally, in the event the Republicans hold the Senate, but Mr Biden wins, we are likely to see the reemergence of fiscal conservatism, at least in a sense, and potentially any bill will be smaller.

With that as our backdrop, the consensus view remains that a Biden victory will see a weakening of the dollar, a steepening of the yield curve and an equity market rally.  Meanwhile a Trump victory will see a strengthening of the dollar, a more modest steepening of the yield curve and an equity market rally.  It is quite interesting to me that the consensus is for stocks to continue to rise regardless of the outcome, and for the long end of the bond market to sell off, with only the degree of movement in question.  I have to ask, why is the dollar story different?  The one conundrum here is the expectation of a weaker dollar and a steeper yield curve.  Historically, steep yield curves, implying strong future growth, lead to a stronger dollar.  And after all, it is not as though, the dollar is at excessively strong levels that could lead one to believe it is overbought.  Regardless, this seems to be what is built in at this stage.

Moving on to the FOMC, Thursday’s meeting, two days after the election, is likely to be the least interesting meeting of the year.  It strains credulity that the Fed will act given what could well be a lack of clarity as to the winner of the election.  And even if it is clear, they really have nothing to do at this time.  They are simply going to reiterate the current stance; rates will not rise before 2023, they will continue to purchase bonds ad infinitum, and please, Congress, enact some more fiscal stimulus!

As to Friday’s employment report, it will depend on whether or not the election is settled as to whether the market views the numbers as important.  If the results are known and it is the status quo, then investors will pay attention to the data.  However, if either there is no clear result, or there is a change at the top, this will all be ancient history as the market will be preparing for the new Administration’s policies, so what happened before will lose its significance.  This is especially so given the expectations for a significantly larger fiscal stimulus outcome, and therefore a significant change in economic expectations.

So, that is how we start things off.  Equity markets have shaken off last week’s poor performance and are rebounding nicely.  Asia started things on the right foot (Nikkei +1.4%, Hang Seng +1.5%) although Shanghai was flat on the day despite a better than expected Manufacturing PMI print (53.6).  Europe, meanwhile, is rocking as well, with the DAX (+1.85%) and CAC (+1.8%) both ripping higher while the FTSE 100 (+1.2%) is also having a solid day.  US futures are all pointing sharply higher as well, around 1.5% as I type.

Bond markets are actually mixed this morning, with Treasuries rallying slightly, and yields lower by 1.5 basis points.  However, in Europe, we are seeing bonds sell off (risk is on, after all) although the movement has been quite modest.  After all, with the ECB promising they will be adding new programs come December, why would anyone want to sell bonds the ECB is going to buy?  Of more interest is the fact that Treasury prices are rallying slightly, but this is likely to do with the fact that the market is heavily short Treasury bond futures, and some lightening of positions ahead of the election could well be in order.

On the commodity front, oil prices are falling further, as the renewed wave of lockdowns in Europe has depressed demand, while Libya simultaneously announced they have increased production to 1 million bbl/day, the last thing the oil market needs.  Gold, meanwhile, is moving higher, which strongly suggests it is behaving as a risk mitigant, given the fact neither rates are falling nor is the dollar.

As to the dollar, arguably, the best description today is mixed.  With so much new information yet to come this week, investors and traders seem to be biding their time.  In the G10, it is an even split, with three currencies modestly firmer, (CAD, NZD and AUD all +0.2%) and three currencies modestly weaker (NOK and GBP -0.2%, CHF -0.1%) with the rest essentially unchanged.  The one that makes the most sense is NOK, with oil continuing its slide.  Surprisingly, the pound is weaker given the story circulating that the EU and UK have essentially reached a compromise on the fisheries issue, one of the key sticking points in Brexit negotiations.

Emerging market currencies have a stronger bias toward weakness with RUB (-1.25%) and TRY (-1.0%) leading the way lower.  Clearly, the former is oil related while the lira has been getting pummeled for weeks as investors continue to vote on their views of Turkish monetary policy and the economic potential given new sanctions from the West.  But after those two, most APAC currencies were under pressure, somewhat surprisingly given the Chinese data, however, INR and TWD (-0.45% each) also underperformed last night.  On the plus side, CZK (+0.35%) is the leader, benefitting from a better than expected PMI print.

Speaking of data, Manufacturing PMI’s from Europe were all revised slightly higher, but had little overall impact on the FX markets.  This week, of course brings a great deal of info:

Today ISM Manufacturing 56.0
ISM Prices Paid 60.5
Construction Spending 1.0%
Tuesday Factory Orders 1.0%
Wednesday ADP Employment 650K
Trade Balance -$63.9B
ISM Services 57.5
Thursday Initial Claims 740K
Continuing Claims 7.35M
Nonfarm Productivity 5.2%
Unit Labor Costs -10.1%
FOMC Rate Decision 0.00% – 0.25%
Friday Nonfarm Payrolls 580K
Private Payrolls 680K
Manufacturing Payrolls 51K
Unemployment Rate 7.6%
Average Hourly Earnings 0.2% (4.6% Y/Y)
Average Weekly Hours 34.7
Participation Rate 61.5%
Consumer Credit $7.5B

Source: Bloomberg

Adding to the mix is the BOE meeting on Thursday as well, while the RBA meets tonight.  To me, this is just trying to level set as we await this week’s extraordinary possibilities.  Nothing has changed my view that the dollar is likely to strengthen as the situation elsewhere in the world, especially in Europe, is pointing to a terrible Q4 outcome economically (and, I fear in the health category) which will continue to weigh on the euro, as well as most emerging markets.  But one thing is clear, is there is a huge amount of uncertainty for the rest of this week.

Good luck and stay safe
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