Everyone was anticipating the October surprise. Still, honestly, this one came flying in from the left-field, not only caching virtually everyone flatfooted but probably hit at the most vulnerable time of the week as a risk had turned off due to the fiscal impasse.
The immediate de-risking made sense. But the first thing that has become quite apparent is that with President Trump testing positive for COVID, it has had all but punched Bidens Blue ticket to the Oval office. It is now time to revaluate where corporate tax hikes and anti-oil legislation come to the fore.
I still favor gold from the long side. There was a bit of whipsawing around the Trump/COVID-19 headlines, but the general trend still looks constructive. It seems attractive to accumulate on dips, targeting 1960-1970 over the next few weeks should equities hold a bid ahead of potential US election headlines volatility. Which I think they could with the future stimulus impulse
Given the uncertainty this news has created, it is no surprise to see the reaction we have overnight with S&P 500 down. Today's payroll report provides another element of volatility, but that will be fleeting.
Both sides continue to negotiate over another round of US stimulus. Last night the House passed the Democrats $2.2tn package with Speaker Pelosi and other Democrats believing a deal could still be done today. Although today is the final day the House is scheduled to be in Washington, they will be kept back over the weekend if an agreement is close. Meanwhile, the White House offer of a $1.6bn package cut little ice with congressional Republicans. Several influential Republicans warned they could not support the deal.
The Tricky One Is Bonds
On Treasuries, the possibility of a win by former VP Joe Biden should push up nominal yields, driven by real rates, which is not especially great for risk. A clean sweep by the Democrats is assumed to equal more fiscal spending, which means more issuance. The short end of the Treasury market is already inundated, and in any case, at current yields, a rational Treasury Secretary would term out along the curve. Since the inflation market is not responding to fiscal/Fed, then the likely outcome will be a steep rise in the term premium, reflecting the more significant issuance duration. Then doubts start to build if the Fed is still willing to monetize all debt.
FX
After a quick dip sub 1.17 again, it has recovered slightly as the President catching COVID could be mainly negative for the greenback. Noise aside, the last couple days, the street has been piling back into EUR/USD longs with the overall more positive sentiment again. The momentum has been hard to fight, and sub 1.17 pretty sticky.
Asia was extremely slow until the Trump news hit the wire, which then saw the market dive under the yen umbrella. We have recovered a bit since –but one has to believe in the overall scheme o there is undoubtedly more downside than upside risk going