Another positive session for equities yesterday and overnight as the US S&P 500 posted another new local high. After a swift move lower early this week, US treasuries have failed to weaken further after large auctions of the 10-year and 30-year treasuries in recent days. The onshore Chinese yuan rate rose more than a percent against the US dollar and to a new 17-month high as Chinese markets reopened after the long Golden Week holiday.
What is our trading focus?
- Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) – the narrative remains positive around a potential clean sweep for the Democrats increasing the probability of a larger fiscal stimulus bill than what could be agreed to before the election. But the market also got a bit of a boost from news indicating that the White House was open to bigger stimulus ahead of the election. Either way, US equities are gaining momentum into the weekend ahead of next week’s US Q3 earnings that will start with financials.
- EURUSD and AUDUSD – The status of the US dollar sell-off is a pivotal question hanging over the FX market, as well as whether investors want to push strongly on any view ahead of the critical US Election. Yesterday saw little volatility in the US dollar pairs in a quiet session, as we continue to watch the greenback trade in recent sessions near key levels around 1.1800 in EURUSD and 0.7200 in AUDUSD.
- USDCNH (offshore tradeable yuan vs mainland USDCNY rate) – China is back from its long Golden Week holiday and the CNY gapped higher against the US dollar, taking USDCNY and its offshore counterpart USDCNH to a new 17-month low. The relative tightness of Chinse monetary policy has seen the CNY posting impressive gains over the last three months, but the question is whether China will want to continue to see its currency strengthen beyond the 2019 low of the 6.65 area in USDCNY/USDCNH if the US dollar isn’t breaking lower more broadly, as this would see the broader Chinese CNY basket like threatening multi-year highs.
- Spot Gold (XAUUSD) and Spot Silver (XAGUSD) – have both returned to near the highs of their established ranges after the White House signaled it is leaning toward a large-scale stimulus bill. The dollar weakened while the 5Y5Y forward inflation swap has risen to the highest since July 2019. The latter in response to polls increasingly pointing to a Biden/Harris win on November 3, an event the market believes may turbo charge the reflation trade through more stimulus spending and with that support for precious metals and commodities in general. Gold is once again challenging the downtrend from the August high at $1912/oz with a break signaling a move towards $1940/oz, the 50-DMA.
- Brent Crude Oil (OILUKDEC20) and WTI Crude Oil (OILUSNOV20) both heading for the biggest weekly gain since June as Hurricane Delta have forced production shut-ins of more than 90% from the Gulf of Mexico. It is due to make landfall on Friday but is once again expected to narrowly miss key oil and refining infrastructure around the Houston area. Adding support has been an oil-workers strike in Norway, stimulus hopes driving a weaker dollar and speculation that OPEC+ may consider postponing the January planned 2 million barrel/day production increase. Next week OPEC and the IEA will deliver their monthly oil market reports. WTI crude found resistance overnight at $41.50/b.
- Treasuries 30-year auction (30YUSTBONDDEC20). 30-year Treasury auction was weak, the yield awarded was 1.578% vs 1.567% expected by the market. The bid-to-cover ratio which is a measure of demand was 2.29, lower compared the 2.31 of last month.
- European small cap stocks (DX2J:xetr) – European small cap stocks continue to outperform large caps indicating stronger investors sentiment and potentially bets on a stronger European economy and more stimulus.
What is going on?
- The Bank of Canada’s Governor Macklem mentions negative rates as a policy option although in bringing up this topic, he was quick to point out that there was no active discussion on employing negative rates at this time. The Canadian rates and currency markets hardly registered the development as the CAD continued to surge higher against the US dollar after the 1.3250 area support in USDCAD gave way yesterday and the WTI oil price rose to new local highs. Canada reports its September job numbers today.
- The grain and soy markets await monthly WASDE report – Chicago Wheat (WHEATDEC20) reversed lower yesterday after reaching a five-year high on dry weather concerns in the U.S. as well as the Black Sea area. This ahead of another key test of the recent strength across the sector when the US Department of Agriculture at 16:00 GMT releasing its monthly WASDE briefing on world crop supply and demand. The market has priced in expectations for an across the board lowering of both world and U.S. ending stocks for 2020/21 compared with September.
- US Weekly Initial Jobless Claims remain elevated at 840k – while the weekly continuing claims number dropped by more than 1 million from last week’s upwardly revised number to just under 11 million. The latter news is not necessarily a positive development if the drop is due to a subset of workers exhausting their benefits due to the length of their time out of work. Indeed, some 2 million US unemployed have exhausted state benefits and are now receiving extended benefits from a federal programme that can provide benefits for up to 13 weeks, this is up from 1.8 million last week.
- European sovereign yields fell lead by the Periphery – After the ECB released the Governing Council meeting account of the 9-10 of September, we have seen yields in the European sovereign space diving lead by Spain and followed by Portugal. In the report it was agreed to maintain monetary support until economic data improves. The market now expects the ECB to increase the PEPP programme this December.
What we are watching next?
- US stimulus prospects still a large question mark. The latest is that the two sides are still negotiation, with Democrat House Speaker Pelosi rejecting any standalone airline bailout deal as she seeks a broader stimulus package.
- US Q3 earnings. Next week the earnings season kicks into gear with major US financials such as Wells Fargo and JPMorgan Chase reporting earnings. Given analyst expectations for a strong rebound in earnings there are a lot at stake the next two months. If earnings disappoint it could be a major roadblock for equities and potential a strong catalyst for a setback.
Economic Calendar Highlights for today (times GMT)
- 0800 – Italy Aug. Industrial Production
- 1200 – Poland Central Bank Meeting Minutes
- 1230 – Canada Sep. Net Change in Employment
- 1230 – Canada Sep. Unemployment Rate
- 1600 – US WASDA Report
- 1930 – Weekly COT report from the U.S. CFTC
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