Markets continued to suffer from last week’s risk-off correction backlash, with the second wave of European and UK lockdowns dampening the global outlook – Stock Market Analysis Today : It’s the final countdown.
And none more so than oil prices, which took a nosedive at the Asia open. But the overall sentiment remains fine, suggesting this weekend UK lockdown announcements were not a considerable surprise to global stock market investors.
However, oil has its idiosyncratic issues even with traders re-rating European and UK road fuel demand lower.
A considerable element of uncertainty around the end of the month OPEC meeting has the oil complex hedging that might be too premature for OPEC+ to adjust at this stage.
Essentially, there is no budgetary incentive for neither Russia nor Saudi Arabia to cut production unless the oil price reaches mid-$20s/bbl.
But one view that is becoming more apparent for oil prices by the day is that the holiday season could turn quietly chaotic for oil markets as folks will opt to isolate rather than celebrate, possibly sending both mobility and fuel consumption even lower.
Risk reduction into the US election should allow asset prices to react more asymmetrically to a “blue wave” event.
Polls still show Biden on the lead
Polls suggest Democratic candidate Joe Biden is ahead of President Trump at the national level and in the battleground states.
However, according to polls released over the weekend, key races are running close, including Pennsylvania, Florida, Arizona, and Wisconsin.
The focus should turn to whether a definitive outcome is likely in the hours following the election.
A ‘blue wave’ outcome (Biden presidency, Democrats take Senate, Democrats hold House) remains an attractive and clear path towards reflationary trades outperforming, including UST curve steepeners, long industrial metals, emerging market equities and a weaker US dollar.
Over the past week, these trades’ underperformance suggests improving risk vs. reward in these trades on a Democratic sweep of Congress.
But a split Congress or delayed election result after Nov. 3 puts the focus squarely back on the global economy, with prospects for US fiscal stimulus likely diminishing under these scenarios.
A ~4% decline in WTI and Brent front-month oil prices at the Monday Asia open highlights the importance of a unified Congress in offsetting concerns around slowing global economic activity.
These concerns were exacerbated over the weekend, with the UK joining other major European economies in announcing a four-week national lockdown for England until Dec. 2.
Meanwhile, the Democratic Senate odds are ticking higher again. Hence the border market remains supported. The Senate is all that matters for stimulus, hence gold, currency markets, and stocks.
This outcome’s asset-market impact will likely focus on the effects of more lavish fiscal spending, bullish for equities, and the bonds bear steeping will encourage USDJPY upside.
The impact on emerging market assets, particularly commodity-driven equity markets and their related currencies, could be flattering on fiscal spending expectations.
Market to look past rolling lockdowns
Accelerating COVID-19 cases and new shutdowns are not acceptable by any means and do offer up a gloomy backdrop. Still, I think the market will quickly look past these new measures in France, Germany, and the UK because
a) Rolling shutdowns are part of the pandemic “new normal,” and most people understand this will be a global feature until we get a vaccine or herd immunity
b) Vaccine rollout is near for some large economies. The UK and Germany could be vaccinated this year, and the market usually embraces themes once they are around 6-8 weeks away.
As vaccine rollout sees confidence rise, COVID-19 case data becomes less critical and feels coincident, not a leading narrative for the economy. I do not have an edge on vaccine release dates. I am just talking about the general vibe I’m getting for the various candidates.
Speaking of positive vibes, China’s Caixin Manufacturing PMI Strongest Since 2011
In line with the positive trends show in China’s official PMI for October, the Caixin manufacturing continued to signal a further improvement in the manufacturing sector, coming in at 53.6 (cons: 52.8, Sept: 53.0). With the COVID-19 situation seemingly under control domestically, China’s manufacturing supply and demand have improved at the same time.
Enterprises indicated they were willing to increase inventories. Prices tended to be stable. Business operations improved, and entrepreneurs were confident, though the pandemic’s twists and turns overseas remain a headwind for exports. Growth in new export orders softened notably amid a resurgence of COVID-19 cases across several of China’s export markets.
Nonetheless, more robust overall market conditions led to a very favourable survey result – the highest print since January 2011. And hopefully, once the markets get through the US election risk event and finally put that risk rear-view mirror, China improving landscape should support the cyclical rotation into China stocks.
Stock Market Analysis Today : It’s the final countdown