Dawn Of The Dark Winter

By Adam Button

The combination of resurfacing lockdowns and profit downgrades from once-safe haven companies cast a quick and vicious selloff on global indices. Fresh lockdowns in Italy and Spain along with record case numbers all over the developed world on the weekend threaten to upend the recovery. Peculiarly, AUD and NZD remain the only currencies to not fall against USD. CFTC positioning is below. Ashraf's tweets below cover the unfolding situation starting with SAP's downgrade on Sunday night. 

Tweet

The euro strength of the past week remains a puzzle. Some of that is a better tone on Brexit but the resurgence in the coronavirus no doubt dims in the economic outlook for Q4 and Q1 2021. No doubt positioning ahead of the US election is playing into it.

The growth in virus numbers in Europe is daunting. In Italy cases hit a record 21,273 on Sunday. A week earlier, they were at 10,009; a week before that at 5372; and a week before that at 2499. The nearly 100% w/w growth rate is terrifying and the government responded with a partial lockdown that will limit hours for restaurants while closing entertainment and gyms.

A similar dynamic is unfolding elsewhere. In Spain a national curfew from 6am to 11pm was imposed and a tighter lockdown is rumored in France.

In the US, cases have spiked to a record 82K cases and there are rising cases in the middle east and the largest outbreak in China in months.

The market may be preoccupied with the US election at the moment and not appreciating the possibility of much slower growth in the next five months. We may be nearing a tipping point where it can't be ignored. Some countries have shown resilience to the virus and there's no chance that lockdowns are as broad as in March but combined with waning stimulus money there's a big risk that consumers retrench in what Biden warned will be a 'dark winter'.

Oil may be particularly vulnerable a slowdown in activity, especially with Libya set to add roughly 800kbpd in Oct/Nov.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR +166K vs +168K prior GBP -2K vs -10K prior JPY +14K vs +20K prior CHF +14K vs +12K prior CAD -19K vs -14K prior AUD +7K vs +4K prior NZD +6K vs +6K prior

Sterling shorts were fortunate (or smart) to square up ahead of last Wednesday's announcement of a restart of negotiations. However the lack of follow-through in GBP afterwards highlights the uneasiness of the market.