Messy markets
Asset markets are reacting in a messy fashion which is symptomatic of just how messy the presidential debate was covering the Supreme Court, COVID-19, the economy, race, law and order, protests, the environment, and election integrity. The concern for Democrat Biden’s camp ahead of the debate was fluency on the night. He passed that test, but not with flying colors
But the extent to which the debate matters for markets is whether ‘undecideds’ are swayed either way. Polls in the comings days could provide more color on any movement.
So things could be whippy but the post-election gridlock trade looks set to take president as the dollar goes bid and stocks sell-off on potential narrowing in the election polls. Trump had Biden on the ropes so let's see how the polling number play out in the polls
One of the few interesting takeaways from the debate was Biden hinting at President Trump’s subservience to China's Xi. Biden as president would be more predictable than Trump when it comes to foreign policy, but not substantively easier on China
China Data
In line with the positive trends seen for NBS PMI, China's Caixin manufacturing PMI continued to signal a further solid improvement in the manufacturing sector, at 53 in September despite being 0.1pp lower than August.
Different from the NBS PMI that covers a larger sample size, mainly consisting of large enterprises (eg. SOEs) across the nation, the Caixin sample is skewed toward smaller businesses and exporters in the Eastern coastal areas, which contribute more than half of the nation’s GDP but were hit hardest by the COVID-19 pandemic.
Chinese manufacturers recorded a sharp and accelerated increase in total new work in September, with a number of firms seeing that a further recovery in client demand had boosted sales. Furthermore, the rate of new order growth was the steepest since the start of 2011. Stronger external demand also lifted sales, with the new export business expanding at the quickest pace since August 2017.
The economic recovery has picked up pace with supply and both domestic as well as overseas demand improving. Chinese manufacturers seem more optimistic about the economy for the next 12 months. The continued recovery in the manufacturing sector could take some pressure off policymakers. In the near future, however, great uncertainties remain about the overseas pandemic and the US election.
Market concerns
So far, the first US presidential debate is not playing out in spot markets yet, with equities, the US dollar, and UST yields primarily not trading off neither the run-up nor the real-time sentiment polls.
Instead, the markets remain keenly focused on the potential vaccine breakthroughs set against social-mobility restrictions. And as all fingers remain crossed for a US stimulus deal, which from any moral perspective you need think something will happen. Hence the buy on the dip proclivity while ignoring the podium pandamonium playing out on national TV.
Yen vol is the election signpost.
For the election specifically, the focus is on vol markets, where the difference between 1m and 2m USD/JPY implied vol is + 2.68 vol and the highest in the time series' history. Indeed, this reflects mounting market fears about a delay in the US political system delivering a quick result after election day (Nov. 3), with mail-in votes featuring prominently this year due to COVID-19.
And suggesting that the mountain of risk lies not in who is selected but rather how tight the contest will be.
A highly-polarized and possibly legally-contested US election is just around the corner. With mail-in votes likely to be too high (and potentially questioned), there is a chance that we still will not know the result by Inauguration Day with constitutional chaos ensuing. At a minimum, some delay in a victor emerging is unlikely if the election is not close. Polls at the moment still suggest a relatively close contest.
Polling Risk
Polling has been relatively stable in recent weeks, with prediction markets pricing a 58% chance of a Biden win, a 58% probability of the Democrats taking the Senate, and 85% that they retain the House. In other words, prediction markets are pricing in a Democrat sweep, which somewhat belies how close some of the battleground states are polling. Nonetheless, Trump's strong showing in the first debate could stir spot markets and encourage the unwind of trades that would benefit from a Biden presidency.
I'm sure the media will declare a winner for sure, but best to defer to the court of public judgment, which could take a bit to gather a consensus, but I suspect trader will focus on the broader quarter and month' end impulses.
Asia FX risk
Negative foreign policy implications for China are at the top of the list, with currencies with greater sensitivity to China's supply-side driven recovery that North Asia (KRW, TWD) and base-metal exporters (CLP) ones to watch in this scenario.
GBP
US presidential debate could provide some GBP volatility, although I do not think this is likely. Brexit headlines are more relevant this week, and there is expected to be posturing on both sides, which will move short-term FX dial.
Still, month-end rebalancing could spice things up a bit., but if it is the case, look for the dollar to tun bid into the London open.
Stimulus hopes. Wishful thinking
Investor's moral compass pines for a stimulus deal as a chorus of Fed members continue to gaslight Congress. Still, traders remain utterly unsure if the Republican senators will bend the knee to the latest stimulus proposal. The market desperately needs this fiscal boost juice and I believe it will happen but to point out the other side of the equation, see below
US Democrats and the White House are piling pressure on Republicans to deliver a fiscal package before the Nov. 3 presidential election—but realistically, there's truly little chance of a deal. The fiscal conservatives in the Republican Party only want a limited package, which falls far short of the $2.2 trn offered by the Democrats. The Democrats' package has been on the table for a while, but Republicans have not been keen to engage.
Just one-third of the Senate is up for re-election in November, of which 23 seats are Republican. At this point, only four of those seats are genuinely at risk of falling into Democratic hands. That means most Republican senators have no trouble standing pat.
Gold
There is one thing that stands out in the US's front end for gold traders, and it is the premium to the puts in the two-year mid-curve. There is nothing outrageous in that. The Fed has been quite evident that negative rates are not likely to be pursued, and the risks of hurting the money market funds when Treasury issuance is expected to ramp up seems to confirm this.
As time goes on with low rates in the price, the market has to price in some probability of it working.