Global growth barometers are getting hammered in Asia with crude oil tanking over 2% and hugely underperforming in the context of a 0.6% fall in S&P 500 futures. – Stock Market Analysis Today: Covid-19 headlines hammer investor sentiment.
European governments, including Italy and Spain, announced tighter social mobility restrictions over the weekend after a sharp rise in recorded coronavirus cases. However, announcements in both countries fell short of national lockdowns.
At this stage of the oil demand recovery cycle, waning global demand due to Covid-19’s 2nd and 3rd wave mobility restrictions and more barrel coming to market due to Libya lifting the force majeure is unequivocally the most toxic elixir for oil markets to kick off a new week.
Fortunately, there are several vaccines in the pipeline, or we could have been looking at a pretty significant market reset this morning with Covid-19 flash points flaring up in virtually every corner of the globe this weekend.
These headlines’ ability to incite both public and market hysteria can not be underestimated, so we could eventually end up facing a pretty big economic downward correction in Q4 even without nationwide lockdowns and vaccines possibly available by year-end.
But removing the vaccine sugar coat, and with European governments announcing tighter social mobility restrictions over the weekend after a sharp rise in recorded coronavirus cases, how far are we away from instituting national lockdowns again?
One of the enormous economic risks from the rise in Covid-19 cases is payroll growth’s negative implications, which encapsulates “the sum of all fears,” and the gnarly inference of more lockdowns and mobility restrictions could hamper economic activity.
When folks do not have jobs, they do not or cannot spend and unambiguously hurts economic growth on so many levels.
In September, the negative correlation with payrolls was rising as Covid-19 cases rose. September also continued the pattern of slowing job growth. With Covid-19 cases rising, job growth in the coming months in the most unvirtuous circle of events could be a considerable risk.
US dollar remains under pressure
Into the last lap before US elections, the US dollar Index remains under pressure, printing fresh year-to-date lows earlier this week. An echo of biggish pricing for a Blue Wave US election outcome.
In particular, the market is heavily focused on significant Blue Wave fiscal spending.
The Euro – Stock Market Analysis Today
The European Central Bank’s (ECB) foot plant could be felt this week on the Euro.
Post or even pre-US election pump, I would expect traders to pivot to early-stage developments around the threat to the European growth story, the explosion of Covid-19 in the continent and the worrying economic effects from increasingly more stringent lockdown measures, crush sentiment.
Given the current deflationary outlook, the ECB’s Governing Council will be keen to outline its monetary policy guidance’s next contours in light of the second-wave Covid-19 surge.
For October, the ‘flash’ composite Eurozone PMI fell below the no-change mark of fifty that demarcates expansion and contraction in October (49.4, from 50.4) for the first time since June.
Downside risks to the region are growing, framed by an 8.2% rally in EUR on a real effective exchange basis since the February 19 lows. A positive real yield spread for the Eurozone over the US is a medium-term tailwind for EURUSD.
However, growing downside cyclical for the Eurozone relative to the US could dominate and drive downside in the cross in the near term.
Even if a convincing Democratic sweep of the US election on November 3 should lead to a lively bounce in risk sentiment, the rapid acceleration in new Covid-19 cases across Europe suggests optimism could be fleeting, especially for the Euro.
The Pound: Something smells fishy
Friday’s GBP move higher quickly ran out of steam following the Brexit-positive headlines indicating France is preparing to compromise fisheries in Brexit talks.
On the one hand, fishing is likely to be the least difficult of the remaining hurdles to clear, so the GBP fade is understandable. The headline algos might have liked what they saw as the savvier trader sold into the rally.
There is a decent list of negatives piling up for the UK. The market is positioned for a positive result from Brexit, so there will be very little new information or a positive surprise factor at this point.
Given the ongoing negative rates debate at the BoE the miserable reads on the latest PMI, GBP risk is asymmetric to the downside post these Brexit talks regardless of the US. elections
China’s Communist Party Plenum gets underway
The fifth plenum of the 19th Chinese Communist Party Congress kicks off today. The four-day closed-door meeting runs through Thursday, with officials set to hammer out a 14th Five-Year Plan (2021-25).
In a probable break from the norm, the new guideposts are expected to de-emphasize or even lower GDP and focus on boosting domestic demand and structural reforms, based on the “dual circulation” theme.
State media headlines will be about growth plans and new policy priorities, but related documents won’t be released before ratification by the National People’s Congress in March.
The Yuan – Stock Market Analysis Today
Traders remain cautious in chasing the move lower in USDCNH, particularly into the US election, given a lot of the good news around US stimulus, and the “Biden Premium” is in the price. Unequivocally the US elections are the next catalyst for the Yuan and Asian currencies.
Regardless of the Senate composition, a Biden Presidency should materially reduce the geopolitical risk premium around trade and foreign policy.
And while a split Congress might make a significant fiscal deal less likely, it should cooperatively reinforce the Fed’s accommodative stance and help Asia/EM carry.
Stock Market Analysis Today: Covid-19 headlines hammer investor sentiment