7th October 2020 – Macro Daily
Risk assets were sent tumbling late in yesterday’s US session when US President Trump announced via Twitter that he had instructed his representatives to stop fiscal stimulus negotiations with the Democrats until after the election, while accusing the Democrats of not negotiating in good faith. The S&P 500 ended the session 1.4% lower, with the index slipped from above 3400 to below 3350. Moreover, at the time, US bond yields saw a substantial drop and USD shot higher to just under 93.90 from around 93.50.
However, we have seen a decent recovery in sentiment this morning and since the overnight session; S&P 500 futures are up about 0.6% (back above 3370), European indices trade mostly in the green (Stoxx 600 +0.1%), US bond yields have been on the rise back towards yesterday’s levels (while the curve has returned to steepening) and USD has been coming off in recent trade.
Indeed, on the week, the S&P 500 still trades in the green; quite extraordinary given that US fiscal stimulus “hopes” had been slated as a key driver of recent stock market gains. To be fair, pre-election stimulus is not totally off the table; Trump tweeted last night for Congress to approve assistance for airlines, a payment protection programme for small business and also proposed a Stand Alone bill for Stimulus Checks of $1200 per person.
Alternatively, perhaps markets are hoping that fiscal stimulus delays might prompt the Fed to step up; this is unlikely in my opinion given last night’s comments from Mester that the timing of fiscal support is less important than the package itself (does this imply they are willing to wait until 2021 for a “good” package?). We have five more FOMC members speaking tonight after the release of the FOMC minutes (which ought to be pretty stale by now), who will likely touch on this topic.
As noted, USD rebounded strongly amid the deterioration in risk appetite following Trump’s collapsing of stimulus talks. DXY shot back above its 21dma (at 93.61) to reach highs of 93.90 last night, although with US equity futures recovering overnight and into this morning, DXY has slid back into the 93.60s and is lower by nearly 20 points on the day. Technically speaking, the picture does still look somewhat bullish; DXY has rebounded strongly from its first proper retest of a longer-term downtrend linking the 3rd, 12th August and 8th, 17th September highs. With positioning still very short (unusual this close to an election), USD could well be in for more upside in the coming weeks.
Moving on; EURUSD has largely shrugged off disappointing German Industrial Production numbers for August (a 0.2% M/M contraction vs expectations for growth 1.5%) and has been on the front foot in recent trade amid the gradually softening USD. The cross recently crossed back above 1.1750, a reasonable recovery from last night’s lows in the 1.1720s, although still some way off pre-Trump stimulus talks announcement levels in the 1.1780s. Yesterday morning’s low, as well as the 21dma sit in the 1.1760s and could provide resistance.
GBP is also trading in the green vs both the buck and single currency this morning, despite somewhat concerning news flow on both the Brexit and potential UK lockdown fronts; GBPUSD has recovered back above the 1.2900 mark this morning and is this morning’s third best G10 performer.
Regarding the latest on Brexit; RTE reported that some EU fishing states are hardening their stance against the EU making any concessions to the UK in the “current phase” of talks. This comes after positive reports that substantial progress was being made on the issue of fisheries yesterday, but also reports that the EU plan on ignoring UK PM Johnson’s 15th October “deadline”.
On the UK potential lockdown front; the Telegraph reported that the UK PM was “grappling” last night on the decision as to whether or not to impose tougher lockdown restrictions for millions of people in the north, a discussion which is also said to have divided the Johnson’s Cabinet. A follow up report from Politico this morning suggested that Johnson is considering imposing lockdown-style restrictions on Northern English cities “within days”, as “soaring hospitalizations force Downing Street into a major escalation of its efforts to contain the Covid-19 pandemic”.
Elsewhere, the two best performers this morning are AUD and NOK; AUDUSD was sent tumbling from around 0.7150 to 0.7100 last night by Trump’s announcement on stimulus talks, but found strong support at the big figure and has since recovered back into the 0.7130s in line with the recovery in US and European equities (which is also helping even more risk-sensitive NOK). NZD, CHF and CAD are also making back lost ground vs USD, albeit to a lesser extent.
Turning to the underperformers; alongside USD, JPY is struggling and lower by 0.1% vs the dollar, hurt by risk on flows. SEK is also lower vs USD by about the same amount, despite a lack of any Sweden specific fundamental developments.
The Day Ahead
0825BST/0325EDT, ECB’s Schnabel participates in a panel discussion at the Annual Single Resolution Board (SRB) Conference in Brussels
0830BST/0330EDT, UK Halifax House Price Index (Sep)
0900BST/0400EDT, ECB’s de Guindos participates in an online event “Entrevista Conversaciones 2020” organised by El Economista
1115BST/0615EDT, ECB’s Mersch delivers pre-recorded speech at the 50th Anniversary of the Werner Report event organised by the Luxembourg Center for Contemporary and Digital History
1300BST/0800EDT, BoE MPC member Tenreyro speaks at an event hosted by Argentina’s trade ministry and the Argentine-British Chamber of Commerce
1300BST/0800EDT, Riksbank Deputy Governor Skingsley gives her view of the coronavirus pandemic and the conditions for monetary policy in the period ahead
1310BST/0810EDT, ECB President Lagarde delivers pre-recorded speech at Paris Europlace online International Financial Forum… In an interview with the WSJ released yesterday morning, the ECB President reiterated that the ECB is prepared to add further stimulus, including via rate cuts, to support the Eurozone economic recovery, which she described (perhaps a little more dovishly than in the past) as looking “a little bit more shaky”.
1330BST/0830EDT, French Finance Minister Le Maire to speak at Paris financial conference… The French Finance Minister might soon unveil government measures to help the Covid-19-hit hospitality sector, as hinted yesterday.
1330BST/0830ETD, Norges Bank Deputy Governor Wolden Bache participates in a webinar arranged by Citi Market
1500BST/1000EDT, Canadian Ivey PMI (Sep)
1530BST/1030EDT, Weekly EIA Crude Oil Inventories… Last night, headline API Inventories for the week ending on the 2nd of October rose 0.95mln bbls, a a little more than the expected 0.3mln bbls. Cushing built 0.75mln bbls, Gasoline drew 0.87mln bbls, a slighty larger draw than the expected 0.5mln and Distillates drew -1.0mln in line with expectations.
1730BST/1230EDT, ECB’ Villeroy de Galhau to speak at Paris financial conference
1900BST/1400EDT, FOMC Minutes from the 16th-17th September meeting… At its last meeting, the FOMC kept rates and QE unchanged as expected, but made good on its announced shift in strategy to AIT (first announced in late August at Jackson Hole the Symposium) in unveiling new outcome-based forward guidance. The Fed now promises unchanged rates until the economy has reached maximum employment and inflation is at 2% and on track to “moderately” exceed 2% for “some time”. Moreover, FOMC members’ projections (via the dot plot) signal that rates are expected to be held at zero through 2023 (though one expects a hike in 2022 and four in 2023). Note also that there were two dissenters on the FOMC; Kashkari wanted more dovish wording to the new guidance, while Kaplan wanted more hawkish new guidance, given the risk of “excess risk-taking”. The main message of recent Fedspeak has been a plea to Congress for more fiscal support, and this plea is likely to seen in the minutes (i.e. members agree more government fiscal stimulus is needed…); given Trump’s decision to collapse fiscal stimulus talks last night (a decision that will dismay the FOMC), we are going to have to wait until after the election or this. Markets seem to disappointed by the fact that the Fed has not been forthcoming in indicating more incoming stimulus to back up its new dovish forward guidance – nothing in today’s minutes is likely to change this.
Fedspeak: 1900BST/1400EDT Williams moderates virtual conversation organised by the economic club of New York, 1915BST/1415EDT Kashkari (on economic impact of structural racism), 1940BST/1440EDT Bostic (also on racism and the economy), 2000BST/1500EDT Williams (no the road ahead for Central Banks), 2020BST/1520EDT Rosengren (also on racism and the economy), 2130BST/1630EDT Evans (on current economic conditions and monetary policy)… Expect all to express disappointment about the collapse in fiscal stimulus negotiations as FOMC member Mester did last night.
0200BST/2100EDT, US Vice Presidential Debate between Democrat Nominee Kamala Harris and Republican Nominee Mike Pence… National polling have so far this week shown Biden extending his lead over Trump since last week’s Presidential debate, though polling is yet to encapsulate the time since Trump was diagnosed with Covid-19. Trump’s decision to last night collapse stimulus talks will of course be a key topic of debate.