The countdown is on
The next couple of weeks will be crucial to how we end the year in financial markets and investors are standing by, waiting to respond. It’s deal making time, with months – or in the UK’s case, years – of negotiations coming to a head as the clock ticks down. The US election is in the final stretch and every passing week brings us one step closer to a Covid vaccine. A huge amount of event risk that will ensure it’s a fascinating end to an otherwise horrific year.
In addition to the November 3rd Election Day, the focus in the US will fall on the advance reading of GDP, the COVID-19 spread, and big tech earnings. The US economy is expected to post a record-breaking rebound in economic growth in the third quarter. The Q3 growth measure is expected to rise 32.0%, erasing away the -31.4% contraction seen in the prior quarter. This is the last big data release before the election and could influence some voters on the direction of the economy.
The virus spread is intensifying in the US and record high cases seem very likely. The third wave of the virus continues to cripple the Midwest, but hospitalizations are not rising as sharply as many younger individuals are getting exposed. For now, the US has not seen anything close to the lockdown and restrictive measures happening in Europe, but that could change if another surge happens.
The third week of earnings season heats up with some mega-cap tech results from Facebook, Apple, Alphabet, and Amazon. Close attention will also fall on industrials and transport earnings reports from GE, 3M, Airbus, Boeing, UPS, Caterpillar and Honeywell.
It is all about the Senate Race. President Trump had a strong performance in the final and civil debate, but it was not likely enough to move the needle. Former-VP Biden did not have any major slip-ups, although will some argue his oil statement was an unforced error. Biden did a good enough job to keep his lead intact. President Trump will likely see a bump in the polls but with almost a quarter of the vote likely in and the number of undecided voters being in single digits, Wall Street can continue to price in a Biden victory.
Just as important is the Senate race and that will likely take a big queue after the confirmation of Amy Coney Barrett to the Supreme Court. Biden has stated he will come out with a clear position before Election Day about where he stands on expanding the Supreme Court. This could be the biggest risk to the blue wave. Republicans who disapprove of President Trump may want to vote red for the Senate to keep the conservative majority on the Supreme Court. Several Senate races are up for grabs and it appears we won’t have a clearer picture until after Election Day.
The ECB meeting next week could lay the groundwork for more easing in December as the euro area economy flirts with a double dip recession. Covid is wreaking havoc once again which means more restrictions across the bloc. This is particularly taking its toll on the services sector with manufacturing performing relatively well, aided by the economic rebound in China. Policy makers have kept a lid on the euro after Christine Lagarde’s blunder in the last press conference and easing hints next week would go some way to easing deflationary pressures for now.
Negotiations are back underway, with Michel Barnier arriving in London on Friday promising to intensify talks and work towards a deal, one based on mutual compromise. This follows months of both sides pushing the other for concessions and, it seems, last week’s post-EU summit comments were a step too far. Neither side can be seen to be getting a raw deal and comments from Barnier in recent days have convinced Number 10 to return to the negotiating table. A breakthrough now looks possible that will enable both sides to claim a success and avert no-deal. Interestingly, sterling never came under much pressure in response to talks breaking down, with traders clearly having had enough of political theatre and empty threats of the last four years. There is clearly more optimism now though that the foundations are in place for compromise and a deal in the coming weeks.
The UK is continuing to see rising Covid cases and hospitalisations forcing tighter restrictions around the country. The situation is going to get much worse before it gets better, which is going to be a drag on the economy. Expect more stimulus from the Bank of England this year. Brexit remains a huge downside risk for the economy but negotiations took a significant step forward this week.
The CBRT has a real credibility issue and recent actions haven’t helped. The currency hit new record lows against the dollar this week, bringing losses for the year to 25%, as the central bank refrained from raising interest rates, despite markets expectations of a 175 basis point hike. They appeared to have engaged on a tightening cycle last meeting in order to stabilize the currency and address inflation issues but this week showed it still prefers to tighten conditions using other means. Clearly politics is continuing to play a role in the decision making and that comes at a cost for the currency and, ultimately, the economy.
China Communist Party plenum runs Monday to Thursday to set new 5-year plans. Potentially important policy releases to come on Friday.
China Industrial Profits Tuesday should continue the growth tone of recent data, supporting the CNY and China equities. .
Ant Financial IPO opens Tuesday-Thursday with payment Nov 2nd. Potentially strong tailwind for China tech stocks next week.
China Official Pmis released Saturday 31st October, followed by Caixin PMI Monday 2nd. Main risk is disappointing numbers that could lead to a large fall in equities Monday November 2nd.
All eyes will be on the Ant Financial IPO this week, which will open and close this week with trading starting after the Nov 3rd US election. Bullishness on IPO should mollify any risk based selling ahead of the US election.
USD/HKD at the bottom of its trading band with heavy buying from the HKMA. The demand for HKD is due to the Ant Financial IPO this week.
HK GDP and BoT expected to show the real economy remains deep in recession with Cathay Pacific announcing massive layoffs this week.
No significant data this week.
Indian Rupee continues to weaken after appalling GDP data. Rampant Covid-19 continues to crush economic activity and India’s potential recovery. Weak BoP, monetary and fiscal positions with stagflation potentially India’s biggest headache. Continues to be Asia’s weakest link along with Indonesia.
Landslide victory for Labour at elections boosted NZ Dollar. Equities mostly unmoved. No significant data this week.
RBNZ continues to telegraph negative rates and the NZ Dollar could come under sustained pressure this week ahead of the US election as risk is taken off the books globally..
Australian markets shrug off reports of China coal bans now, focusing on a potential rate cut from the RBA on November 3rd. Covid-19 restrictions eased. Financials and resource sector outperformance to continue.
Copper and iron ore remain near year highs supporting the resource sector and offsetting China’s bans in minor Australian export sectors. Australian markets will remain resilient unless China starts messing with copper, iron ore or LNG. Unlikely at this stage. The rise in risk aversion tensions is threatening to flip the Australian Dollar into a potentially large downward technical correction. This remains the major risk factor next week.
Australian Dollar and equities may suffer downside pressure this week as risk is reduced globally ahead of the US election. That should be a temporary state of affairs though. The lucky country should remain lucky with domestic data showing recovery remains on track.
Japanese Yen rallies strongly on haven demand from onshore investors ahead of the US Election. USD/JPY could potentially fall to 102.50 ahead of the election, especially if the US Senate result is too close to call, or odds of contested election increase.
Heavy data weal with Leading Index, Retail Sales, Tokyo CPI and Industrial Production. All are expected to underperform as Japan’s domestic and export recovery remains sluggish in contrast to Taiwan and South Korea.
Bank of Japan rate decision on Thursday. Unchanged at -0.10% but a high chance of increased measures to pump money into the economy via lending facilities, and potentially an increase in JGB buying. Yen negative theoretically, but repatriation flows will subsume. The BoJ should be equities positive offsetting risk reduction flows into the US election.
Oil prices were given a big boost on Thursday, as Vladimir Putin refused to rule out postponing production increases planned for January by OPEC+. This was by no means a commitment to do so, nor an acknowledgement that it had been discussed, but his openness to it has been welcomed.
OPEC+ cuts remain at 7.7 million barrels but are scheduled to fall to 5.7 million in January. This is a significant increase that could hit oil prices if the global economy falters in the coming months, as many expect, due to Covid-related restrictions. At this time, the group sees no reason to delay anything but that view may change between now and December, when they’re scheduled to meet and Russia will be critical to any delay.
WTI is back above $40 on the comments which, as we’ve seen so often before, could simply be a simple means of manipulating prices in their favour in the near-term. But if not combined with action, should demand slip as expected, it will only be a short-term boost. Brent continues to see considerable support around $41.80, with WTI seeing it around the $39.50 region.
There isn’t an enormous amount to add on gold in recent days and weeks. The yellow metal continues to hover around $1,900, as we await movement on some of the major risk events that are coming to a head in the coming weeks.
Momentum is just about with the bulls, despite gold spending a little time below $1,900 yesterday, but ultimately, the next move will be event driven and that will probably come from the stimulus talks on Capitol Hill. We may not have to wait too long for movement on that front. A close below $1,900 may signal that talks are collapsing, with a break above $1,930 perhaps meaning good news from Washington.
Key Economic Events
Monday, Oct. 26
– New Japanese Prime Minister Yoshihide Suga addresses parliament for the first time as premier
– The Chinese Communist Party’s Central Committee begins its 4-day all-important plenum, where it’s expected to outline the plan for the economy’s development for the next 15 years.
– WTO holds a dispute settlement meeting where it’s expected to grant the EU legal authority to impose retaliatory tariffs on $4 billion of US exports.
– India Energy Forum (4-day event) by CERAWEEK
– US Senate Republicans are expected to confirm Judge Amy Coney Barrett to the Supreme Court.
US new home sales
Mexico economic activity
Japan PPI, leading index
Singapore industrial production
Germany Ifo business climate
Tuesday, Oct. 27
U.S. durable goods, FHFA house price index, Conference Board consumer confidence
Mexico trade balance
New Zealand trade
South Korea GDP
China industrial profits
Hong Kong trade
Wednesday, Oct. 28
– The CEOs of Facebook, Google and Twitter to testify before a Senate hearing on hate speech, misinformation, and privacy on their platforms.
– Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Wilkins hold a press conference to discuss the Bank’s expected decision to keep rates on hold
– Dallas Fed President Robert Kaplan takes part in a virtual discussion with former BOE and Bank of Canada Governor Mark Carney.
– Weekly EIA crude oil inventory report
– South Africa releases medium-term budget
US wholesale inventories
Canada rate decision
Brazil rate decision
South Korea consumer confidence
Turkey economic confidence
CPI: South Africa, Australia
Spain retail sales
Thursday, Oct. 29
– European Central Bank rate decision: Expected to keep Main Refinancing Rate unchanged at 0.00%
– The advance reading of US Q3 GDP is anticipated to be the strongest on record, a 32.0% rebound from the record dive of -31.4%. Weekly Initial Jobless Claims will also be released.
– Big Tech Earnings from Facebook, Amazon and Apple will closely be watched.
US Q3 Advance Q/Q: 32.0%e v -31.4% prior, Weekly Initial Jobless Claims, pending home sales
Bank of Japan rate decision: Expected to keep policy unchanged
Japan retail sales, consumer confidence, department store sales
New Zealand ANZ business confidence
Australia NAB business confidence
Euro-area economic/consumer confidence
Germany unemployment, CPI
Italy manufacturing/consumer confidence
UK mortgage approvals
Hungary Central Bank: Decision on 1-week Deposit Rate(primary transmission for short rates)
Friday, Oct. 30
US personal income/spending, MNI Chicago PMI, University of Michigan Sentiment
GDP: Canada, Mexico, Germany, France, Italy, Spain, Austria, Portugal, Czech, Hong Kong
Euro-area Q3 Advance GDP Q/Q: 9.4%e v -11.8% prior; Y/Y: -7.4%e v -14.7% prior, CPI, unemployment
South Korea industrial production
Japan CPI, jobless rate, vehicle production, housing starts, industrial production
Australia private sector credit, PPI
Trade balance: South Africa, Turkey
Sovereign Rating Upgrades
– Finland (Fitch)
– Romania (Fitch) Czech Republic (S&P)
– Denmark (Moody’s)
– Netherlands (Moody’s)
– Saudi Arabia (Moody’s)
– Italy (DBRS)