Markets Today: Trump’s last stand

In a few hours Joe Biden and Donald Trump go head to head in the last election debate.

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Today’s podcast

Overview: Heaven

  • US stimulus hopes lift after Pelosi states “we’re just about there”; a few GOP senators to support
  • Democratic Clean Sweep odds lifting, FiveThirtyEight have a Democratic Clean Sweep at 72%
  • Expect more talk of a fiscal ramp which would lift yields and then on what the Fed would do
  • S&P500 +0.5%, US 10yr +4.0bps to 0.86%, USD (DXY) +0.4%, Gold -1.1%, Brent Oil +1.7%
  • Coming up today: US Presidential Debate, NZ CPI, JN CPI, UK Retail Sales, PMIs for EZ/UK/US

“Oh, once in your life you find someone; Who will turn your world around; Bring you up when you’re feelin’ down; Yeah, nothing could change what you mean to me; Oh, there’s lots that I could say; But just hold me now; ‘Cause our love will light the way”, DJ Sammy/Do 2002

 

Odd couples don’t come much stranger than DJ Sammy and Bryan Adams, and yet Heaven went on to become the Eurodisco smash hit of 2002 with its uplifting energy a staple for any spin class.

So it was overnight with hopes of US stimulus remaining high after House Leader Pelosi said “we’re just about there”. Importantly for markets, a few Republican senators have also said they would be willing to pass a $2 trillion package, increasing the probability that a stimulus package can be approved prior to the election that is now less than two weeks away.

Stimulus hopes offset the negative vibe from Europe (Eurostoxx50 -0.3%) and Asia (CSI 300 -0.3%) that came in the wake of allegations of US election interference by Iran and Russia, and rising COVID-19 cases in Europe.

Earnings have also been broadly supportive of sentiment with CNBC reporting 83% of companies that have reported so far have topped expectations by an average of 19%.

Equities rose on the stimulus headlines with the S&P500 +0.5%.

Rates markets have also reacted with the US 10yr yield +4.0bps to 0.86%.

Over the past week there appears to have been a significant change in the way bond markets are assessing the outlook and how probable a US fiscal ramp is with 10yr yields having put on 12.9bps since last Thursday (note implied breakeven inflations have contributed 6.5bps of that move – US 10yr breakeven is at 1.76%).

Part of that reassessment has come on the back of US politics with more commentators talking about the likelihood of the Democrats taking the Senate. To date it seemed a close call on whether Democrats would indeed take the Senate, but interestingly FiveThirtyEight has put a Democratic clean sweep at 72% (see link).

Accordingly

Expect more talk about how high yields could go under a fiscal ramp and what the Fed would do to stem a rise in yields.

US Jobless beat expectations

But remain hard to interpret. US Jobless Claims at the headline came in much lower than expected and at levels not seen since March (Initial Claims at 787k v. 870k expected and 842k previously; Continuing Claims 8.373m v 9.625m expected and 9.397m previously). California though submitted revised numbers which also saw revisions to recent history.

In contrast

The Pandemic Emergency Unemployment Compensation saw its numbers rise by 0.51m to 3.3m in early October, suggesting some of the drop in continuing claims reflects unemployed people shifting onto another program after the 6 month period. According to the press release, in non-seasonally adjusted terms there were 23m people in total receiving unemployment benefits in some form as at October 3 (see BLS for details), and suggests despite the mild improvement in headline claims the levels remain uncomfortably high.

One data piece that was not hard to interpret was Existing Home Sales which beat (9.4% m/m v. 5.0% expected), and illustrative of the strength seen in the housing market to date.

In FX

It was a story of USD strength with DXY up 0.4% with EUR (-0.5%), GBP (-0.6) and JPY (USD/YEN +0.4%) all on the softer side.

There was no clear catalyst of the moves, though it is worth noting the rise in COVID-19 infections in Europe and the imposition of more restrictions have the potential to weigh on growth.

Headlines are not pretty with supermarket hoarding occurring again in Germany, likely in anticipation of another lockdown.

A likely update of the impact on activity will come with the flash PMIs later today which only sees a very mild impact on the services sector according to the consensus.

GBP will continue to remain sensitive to EU-UK trade headlines, fishing rights are said to remain one of the key sticking points in a deal.

As for AUD and NZD

It was a story of mild outperformance with AUD down just -0.2% and NZD +0.1% and both outperforming on the crosses.

The strength seen in the CNY and CNH recently reversed course yesterday after allowing domestic funds to invest more insecurities overseas (USD/CNH is +0.5%).

Coming up today

A mostly quiet day domestically with only the CBA/Markit PMIs which have a limited time history in Australia.

Across the Ditch

NZ has Q3 CPI figures, which may also give some steer towards Australia’s CPI figures next week.

Offshore

The PMIs take prominence and will be closely watched for any impact on activity from rising virus numbers. Details below:

  • NZ: CPI – Q3: Markets are likely to be less sensitive than previously to the CPI given the RBNZ’s focus on growth and jobs given the pandemic-induced downturn. Consensus sees Headline CPI at 0.9% q/q and 1.7% y/y.
  • JN: CPI – September: Consensus sees core inflation (ex food and energy) little changed on last month at -0.4% q/q.
  • UK: Retail Sales – September: Consensus sees core retail sales at 0.5% m/m.
  • EZ/UK/US: PMIs – October: Potentially very market moving as the first signal that rising virus cases in Europe are starting to weigh on activity. Germany’s Services PMI is expected to fall to 49.4 from 50.6, though the Manufacturing PMI is expected to remain well positive at 55.0 from 56.4. The UK PMI is expected to be more resilient so there could be some downside risk – consensus has services at 53.9 and manufacturing at 53.1. For the US, the PMIs are historically less market moving and consensus sees them still well positive with manufacturing at 53.5. and services at 54.6.

Market prices

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