Electees Are Concerned

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
Adf

Aged Like Bad Wine

While Veterans here are recalled
And politics has us enthralled
The dollar’s decline
Has aged like bad wine
With strategies soon overhauled

US markets are closed today in observance of the Veteran’s Day holiday, but the rest of the world remains at work.  That said, look for a far less active session than we have seen recently.  In the first place, with the Fed on holiday, the Treasury market is closed and price action there has been one of the biggest stories driving things lately.  Secondly, while US equity futures markets are trading, all three stock exchanges are closed for the day, so the opportunity for individual company excitement is absent.  And finally, with today being an official bank holiday, while FX staff will be available, staffing will be at skeleton levels and come noon in New York, when London goes home, things here will slow to a standstill.

However, with that as a caveat, the world continues to turn.  For instance, while last week saw meetings in three key central banks, with two of them (RBA and BOE) explaining that easier monetary policy was in store, although the Fed made no such claims, last night saw the smallest of G10 nations, New Zealand, make headlines when the RBNZ explained that they were not changing policy right now, but that the economy there has been far more resilient than expected and they would not likely need to ease monetary policy any further.  It should be no surprise that the market responded by selling New Zealand government bonds (10-year yields rose 14.5 basis points), while overnight rates rose 16 basis points and traders removed all expectations for NIRP. QED, the New Zealand dollar is today’s best performer, rising 0.8%.

Sticking with the central bank theme, and reinforcing my view that the dollar’s decline has likely run its course broadly, although certainly individual currencies can strengthen based on country specific news, were comments from the Bank of Spain’s chief economist, Oscar Arce, explaining that the ECB must do still more to combat the threat of deflation in the Eurozone and that the December meeting will bring an entirely new discussion to the table.  The takeaway from the ECB meeting two weeks ago was that they would be expanding their stimulus programs in December.  Literally every comment we have heard from a European banking official in the interim has, not merely reinforced this view, but has implied that actions then will be massive.

I will repeat my strongly held view that the ECB will not, nay cannot, allow the euro to rise very far in their efforts to reboot the Eurozone economy.  Remember, one of the major benefits expected from easing monetary policy is a weakening of the currency.  When an economy is struggling with growth and deflation issues, as the Eurozone is currently struggling, a weak currency is the primary prescription to fix things.  You can be certain that every time the euro starts to rally near 1.20, which seems to be their tolerance zone, we will hear even more from ECB members about the additional easing in store as Madame Lagarde does her level best to prevent a euro rally.  And if the euro declines, so will the CE4 as well as the pound, Swiss franc and the Scandies.  In other words, the dollar is unlikely to decline much further than we have already seen.

In truth, those are the most noteworthy stories of the session so far.  Virtually every other headline revolves around either the ongoing election questions in the US, both the contestation of the presidential outcome and the upcoming run-off elections in Georgia for two Senate seats and control of the Upper House, or the vaccine and how quickly it can be approved and then widely distributed.

So, a quick look around markets this morning shows that risk appetite is moderate, at best.  For instance, equity markets in Asia were mixed with the Nikkei (+1.8%) continuing its recent strong run, up more than 10% this month, but the Hang Seng (-0.3%) and Shanghai (-0.5%) couldn’t find the same support.  Europe, on the other hand, is all in the green, but the movement is pretty modest with the FTSE 100 (+0.7%) the leader and both the DAX and CAC up just 0.4% at this hour.  US futures, which are trading despite the fact that equity markets here will be closed today, are all higher as well, with the NASDAQ (+1.0%) leading the way after having been the laggard for the first part of the week, while the other two are showing solid gains of 0.65%.

Bond markets in Europe are rising slightly, with yields slipping between 1 and 3 basis points on prospects for further ECB policy ease courtesy of Senor Arce as highlighted above, as there was no new economic data nor other statements of note.  As I mentioned, the Treasury market will be closed today for the holiday.

But commodity markets continue to perform well, with oil prices higher yet again, this morning by 3.2% taking the gains this week to 15%!  Metals prices, both base and precious, are also firmer as the vaccine news continues to spread good cheer regarding economic prospects going forward.

And finally, the dollar is best described as mixed to stronger.  For instance, against its G10 brethren, only NZD is firmer, as explained above.  But the rest of the bloc is softer led by NOK (-0.65%) and EUR (-0.4%).  While the euro makes sense given the Arce comments and growing belief that the ECB will really be aggressive next month, with oil’s sharp rebound, one must be surprised at the krone’s performance.  In fact, this merely reinforces my view that as the euro goes (lower) it will drag many currencies along for the ride.

However, in the EMG bloc, movement has been pretty even (excepting TRY) with a few more losers than gainers, but generally speaking, no really large movement.  On the plus side we see THB (+0.5%) and KRW (+0.45%) leading while on the downside it is MXN (-0.6%) and HUF (-0.45%) in the worst shape.  Looking a bit more deeply, the baht has been rallying all quarter and we may be looking at the last hurrah as the government has asked the BOT to manage the currency’s strength in order to help export industries compete more effectively.  Meanwhile, the won was the beneficiary of a significant jump in preliminary export data, with a 20.1% Y/Y gain for the first ten days of November auguring well for the economy.  Meanwhile, on the downside, the peso, which would have been expected to rally on the back of oil prices, is actually serving as a proxy for Peruvian risk as the impeachment of the president there Monday night has thrown the nation into turmoil and investors are seeking a proxy that is more liquid than the sol.  As to HUF, it is simply tracking the euro’s decline, and we can expect to see the same behavior for the entire CE4 bloc.

And that’s really it for today.  There is no news and no scheduled speakers and the session will be short.  But the dollar is edging higher, so keep that in mind.

Good luck and stay safe
Adf

Over the Moon

Investors are over the moon
And singing a happy new tune
As Pfizer’s vaccine
Has come on the scene
And raised hope we’ll soon be immune

The market responded with glee
As pundits now seem to agree
With gridlock ahead
The vaccine, instead
Will rescue our economy

Frankly, it is hard to keep up with the narrative shifts between yesterday and today as there have been so many new opinions about how the future will unfold.  As I was completing this missive yesterday morning the Pfizer vaccine news hit the tape.  Certainly, the market was unprepared for an announcement that a vaccine with 90% efficacy was in late stage trials, implying that it could soon be approved, and distribution begun.  Hopes for a vaccine had been a key driver of markets on many days in the past several months, although market rallies were ostensibly keyed by hopes for many things like a blue wave, gridlock, and if you go back far enough, a trade deal.  However, the news of the success triggered a stupendous rally in equity markets and risk assets in general while haven assets, especially Treasuries, Bunds and Gilts, along with the yen, Swiss francs and gold, all sold off sharply.  Yesterday, I was cynical regarding the end of the pandemic being at hand, but this morning, that outcome has far more promise.

Of course, the real question is, if this vaccine truly does work, and is distributed widely enough to instill confidence in the general population, how much has the economy actually changed and to what degree are those changes permanent?

Clearly, the biggest change has been the recognition that working from home, for many jobs, is quite viable.  Technology has reached the point where meetings via Webex or Zoom or Partners seem to be quite productive (at least as productive as any meetings ever are.)  My personal experience is that I have gone from driving nearly 2000 miles per month, largely for commuting, to having driven 3000 miles in the past seven months.  Not only have I used significantly less fuel, but my car has seen dramatically less wear and tear, and thus any replacement has been postponed accordingly.  And that is just one facet of the changes.  Commercial real estate and office buildings will likely need to be repurposed going forward as the requirement for corporate staffs to all gather in a single premise has been shown to be unnecessary.

But what about travel and entertainment?  With a vaccine, does that mean people will be jumping back on airplanes to visit clients or relatives or go on vacation again?  Is the movie theater experience ever going to be as desirable again?  After all, given the remarkable array of streaming entertainment services, and the fact that TV’s have grown so remarkably large, watching at home has many advantages over going out, so what percentage of the population will be heading back out soon?  In truth, the one segment I expect to really benefit is restaurants, as while it appears people embraced preparing food at home, I expect the ability to go out, eat and not have to wash the dishes has real appeal to a majority of the population.

My point is the dynamics of economic activity going forward are likely to be very different than that which we remember from before the pandemic and its attendant lockdowns and disruptions.

Of more importance to our discussion here, what does this mean for the central banks going forward.  Remember, Chairman Powell has essentially promised not to raise interest rates until 2023, a minimum of 2+ years from now.  But what if economic activity takes off, as people find a new mix of activities and regain the confidence to gather when desired.  If growth rebounds and inflation (which is already picking up) continues to rise, will they stand pat because of that promise?  Will the ECB?  The BOJ?  The BOE?  Quite frankly, I believe the central bank community was quite happy with the current situation.  They were largely lauded as heroes for preventing even worse outcomes, they had significantly increased their power and sway within governments, and the playbook was easy, print lots of money and buy bonds (or other assets) to support market functioning.  Not only that, they could carp at governments for not implementing fiscal stimulus and the intelligentsia all agreed!

But if this vaccine really is the difference maker, and people return to some semblance of their pre-covid activities, suddenly, central bank largesse may no longer be needed.  And if they continue their current policies and inflation starts to really pick up, they will be the ones being lambasted for their actions or delayed reactions.  While it is very early day(s) in this new story, it is the first time since before the financial crisis where central bankers may find themselves the targets of wrath, rather than the saviors of the world.  (People wonder whether Chairman Powell will be reappointed; quite frankly he may not want the job!)

With all that in mind, how have markets behaved since the news hit the tape?  Yesterday’s equity market performance was quite interesting, as the early euphoria (DOW 29933) reversed and stocks wound up closing much lower, with the NASDAQ actually falling 1.5% on the day.  There was also a huge rotation from the previous winners (Mega cap tech companies) into the previous losers (value and transportation stocks).  Asia followed suit with a mixed session (Nikkei +0.25%, Hang Seng +1.1%, Shanghai -0.5%) and Europe has also lacked some direction.  For instance, the DAX is unchanged on the day while the CAC has rallied 1.1% despite horrific IP and Labor data.  Spain is much firmer (+2.2%) and Italy has fallen (-0.25%).  In other words, this is not a vaccine driven market, rather it has to do with some pretty lousy data out of Europe.  The US dichotomy continues with DOW futures higher by 0.6%, SPX futures basically unchanged and NASDAQ futures lower by -1.6%. Perhaps there was a bubble in some of those stocks after all.

Bond markets continue to sell off everywhere, except Greece, as the narrative here is quite clear; vaccine => rebounding economic growth => less central bank policy ease => higher rates.  So, this morning 10-year Treasury yields are up to 0.94%, 2 basis points higher than yesterday after a 10-basis point rise yesterday.  But we are seeing yields higher between 1 and 3 basis points throughout Europe as well.  The question to ask is, Is the ‘new vaccine makes everything better’ narrative realistic or overdone, and just how long before economic activity actually starts to rebound?

Finally, the dollar can only be described as mixed, but leaning stronger.  Ignoring TRY (-2.0%) which is what we should always be doing, the EMG markets have more losers than winners with ZAR (-0.7%) and PLN (-0.6%) leading the way.  On the flip side, THB (+0.5%) and CNY (+0.3%) are both performing reasonably well.  If anything, it is hard to cobble together a consistent story as to why any of these currencies are moving in their current direction given the inconsistencies.

As to the G10 space, there have been two gainers of note, GBP (+0.65%) and NOK (+0.5%), with only CHF (-0.3%) showing any real weakness.  The rest of the bloc is little changed overall.  NOK is benefitting from the ongoing rally in oil prices, up another 1.5% this morning, which takes the move since Thursday to a 5% gain.  As to the pound, comments from the BOE’s Chief Economist, Andy Haldane yesterday seemed to change the market’s view as to the possibility of negative rates in the future.  By calling the vaccine a “game changer” he implied future central bank actions were likely to be less aggressive.

On the data front, the NFIB Small Business indicator was released right on expectations of 104.0.  Beyond that, we only see the JOLT’s Job Openings data, but that is for September, so has very limited appeal in a market that is seeing massive changes daily.  As mentioned above, Eurozone data was generally lousy, with both French (-6.0% Y/Y) and Italian (-5.1% Y/Y) Industrial Production disappointing and French Unemployment rising to 9.0%, its highest level since 2018.  As well, German ZEW Surveys were quite weak, with Expectations falling to 39.0, far lower than expected.

And so we have a market that needs to look through worsening recent data to the potential for a dramatic change regarding the vaccine and its ability to help economic activity find a new normal.  My view is we have seen significant excesses in many markets during the past several months and years, and there is every chance a significant amount gets unwound.  I do believe volatility will remain with us for a while, as there are many possible outcomes.  But in the end, while the dollar will have bouts of both strength and weakness, the one thing that will not happen is a collapse.

Good luck and stay safe
Adf

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
Adf

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
Adf

Growth’s Pace Declining

Lagarde said, ‘what we have detected’
“More rapidly than [we] expected”
Is growth’s pace declining
And so, we’re designing
New ways for cash to be injected

The pundits were right about the ECB as they left policy unchanged but essentially promised they would be doing more in December.  In fact, Madame Lagarde emphasized that ALL their tools were available, which has been widely interpreted to mean they are considering a cut to the deposit rate as well as adding to their QE menu of APP, PEPP and TLTRO programs.  Interviewed after the meeting, Austrian central bank president, Robert Holtzmann, generally considered one of the most hawkish ECB members, confirmed that more stimulus was coming, although dismissed the idea of an inter-meeting move.  He also seemed to indicate that a further rate cut was pointless (agreed) but that they were working on even newer tools to utilize.  Meanwhile, Lagarde once again emphasized the need for more fiscal stimulus, which has been the clarion call of every central banker in the Western world.

As an aside, when considering central bank activities during the pandemic, the lesson we should have learned is; not only are they not omnipotent, neither are they independent.  The myth of central bank independence is quickly dissipating, and arguably the consequences of this process are going to be long-lasting and detrimental to us all.  The natural endgame of this sequence will be central bank financing of government spending, a situation which, historically, has resulted in the likes of; Zimbabwe, Venezuela and the Weimar Republic.

Now, back to our regularly scheduled programming.

Meanwhile, this morning brought the first set of European GDP data, following yesterday’s US Q3 print.  By now, you have surely heard that the US number was the highest ever recorded, +33.1% annualized, which works out to about +7.4% rise in the quarter.  While this was slightly better than expected, it still leaves the economy about 8.7% below its pre-Covid levels.  As to Europe, France (+18.2%), Germany (+8.2%), Italy (+16.1%) and the Eurozone as a whole (+12.7%) all beat expectations.  On the surface this all sounds great.  Alas, as we have discussed numerous times in the past, GDP data is very backward looking.  As we finish the first month of Q4, with lockdowns being reimposed across most of Europe, it is abundantly clear that Q4 will not continue this trend.  Rather, the latest forecasts are for another negative quarter of growth, adding to the woes of the global economy.

Keeping yesterday’s activities in mind, it cannot be surprising that the euro was the weakest performer around.  In fact, other than NOK, which suffered from the sharp decline in oil prices, even the Turkish lira outperformed the single currency.  If the ECB is promising to open the taps even wider than they are already, the euro has further to fall.  This has been my rebuttal to the ‘dollar is going to collapse’ crowd all along; whatever you think the Fed will do, there is literally a zero probability that the ECB will not respond in kind.  Europe cannot afford for the euro to strengthen substantially, and the ECB will do everything in its power to prevent that from happening, right up to, and including, straight intervention in the FX markets should the euro trade above some fail-safe level.  As it is, we are nowhere near that situation, but just remember, the euro is capped.

Turning to markets this morning, risk appetite remains muted, at best.  Asian equity markets ignored the US rebound and sold off across the board with the Hang Seng (-1.95%) leading the way lower, but closely followed by both the Nikkei and Shanghai, at -1.5% each.  European markets are trying to make the best of the GDP data, as well as the idea that the ECB is going to offer support, but that has resulted in a lackluster performance, which is, I guess, better than a sharp decline.  The DAX (-0.4%) and FTSE 100 (-0.35%) are both under a bit more pressure than the CAC (+0.1%), but the French index is hardly inspiring.  As to US futures, the screen is dark red, with all three futures gauges down about 1.0% at this hour.  One other thing to watch here is the technical picture.  US equity markets certainly appear to have put in a short-term double top, which for the S&P 500 is at 3600.  Care must be taken as many traders will be looking to square up positions, especially given that today is month end, and a break of 3200, which, granted, is still 3% away, could well open up a much more significant correction.

Once again, bond market behavior has been out of sync with stocks as in Europe this morning we see bonds under some pressure and yields climbing about 1 basis point in most jurisdictions despite the lackluster equity performance.  And despite the virtual promise by the ECB to buy even more bonds. Treasuries, meanwhile, are unchanged this morning, but that is after a sharp price decline (yield rally) yesterday, which took the 10-year back to 0.82%.  With the US election next week, it appears there are many investors who are reducing exposures given the uncertainty of the outcome.  But, other than a strong Blue wave, where market participants will assume a massive stimulus bill and much steeper yield curve, the chance for a more normal risk-off performance in Treasuries, seems high.  After all, while growth in Q3 represented the summer reopening of the economy, we continue to hear of regional shutdowns in the US as well, which will have a detrimental impact on the numbers.

And lastly, the dollar, which today is mixed to slightly softer.  Of course, this is after a week of widespread strength.  In fact, the only G10 currency that outperformed the greenback this week is the yen, which remains a true haven in most participants’ eyes.  Today, however, we are seeing SEK (+0.4%) leading the way higher followed by GBP (+0.3%) and NOK (+0.2%).  Nokkie is consolidating its more than 3% losses this week and being helped by the fact that the oil price, while not really rallying, is not falling either.  The pound, too, looks to be a trading bounce, as it fell sharply yesterday, and traders have taken the Nationwide House price Index data (+5.8% Y/Y) as a positive that the economy there is not collapsing.  Finally, SEK seems to be benefitting from the fact that Sweden is not being impacted as severely by the second wave of the virus, and so, not forced to shut down the economy.

In the emerging markets, the picture is mixed, with about a 50:50 split in performance.  Gainers of note are ZAR (+0.7%), which seems to be a combination of trading rebound and the benefit from gold’s modest rebound, and CNY (+0.4%), which continues to power ahead as confidence grows that the Chinese economy is virtually back to where it was pre-pandemic.  On the downside, TRY (-0.5%) continues to be troubled by President Erdogan’s current belligerency to the EU and the US, as well as his unwillingness to allow the central bank to raise rates.  Meanwhile, RUB (-0.35%) is continuing its weeklong decline as, remember, Russia continues to get discussed as interfering in the US elections and may be subject to further sanctions in their wake.

Once again, we have important data this morning, led by Personal Income (exp +0.4%) and Personal Spending (+1.0%); Core PCE (1.7% Y/Y); Chicago PMI (58.0) and Michigan Sentiment (81.2).  Arguably, the PCE data is what the Fed will be watching.  It has been rising rapidly, although this month saw CPI data stall, and that is the expectation here as well.  Now, the Fed has been pretty clear that inflation will have to really pick up before they even think about thinking about raising rates, but that doesn’t mean they aren’t paying attention, nor that the market won’t respond to an awkwardly higher print.  If inflation is running hotter than expected, it has the potential to mean the Fed will be less inclined to ease further, and that is likely to help the dollar overall.  However, barring a sharp equity market decline today, and given the dollar’s strength all week, I expect we will see continued consolidation with very limited further USD strength.

Good luck, good weekend and stay safe
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