Uphill Battle As Traders Are In Pre-Weekend De-Risk Mode

It's been an uphill battle today with the bulk of the market in pre-weekend derisking mode, as investors view rallies as a good opportunity to sell risk. While low liquidity conditions are not helping matters potentially exaggerating price moves, especially to the downside where bids are notably lacking.

These types of trading conditions typically make a fool out of anyone trying to formulate a constructive narrative. (my hand is up)

Prudence says it tough to see markets moving higher with contested election results hanging over the market. Giving traders a touch of pre-weekend heartburn as Covid concerns melding with election risk is likely bringing more attention to the one quick fix that is so desperately needed, which is the elusive stimulus deal as QE can't fix the economy.

A pound or a dollar or a euro of QE isn't worth what it once was. The ability of central bank money to propel an economy forward needs to be questioned. Instead, QE needs to be thought of as increasingly close to monetary financing. Put bluntly, what's the point of QE increases? Answer: to assist government funding and keep credit costs down.

There was nothing of note from the Fed last night with Chair Powell reiterating he was happy with the amount of policy accommodation. He gave little insight into any potential changes to the make-up of asset purchases and instead continued to call for more fiscal support. For now, the Fed remains undeterred by the slowing in the economy, given it followed the sharp rebound in Q2 and expects the recovery to continue. In his view, the worst of the downside risks have been removed.

Not that the Fed really matters at the moment, given the US election gridlock continues. The same can be said for today's US employment report. It is hard to see the market getting overly excited especially if the result remains unclear. It is possible to construct a scenario that a long tail of reopening and related hiring numbers could mean upside risks.

However, the miss in ADP may mean the higher COVID cases and more labor market sensitivity, election uncertainty, and less stimulus may have put a brake on hiring. At the margin, given the ongoing uncertainty, I don't think the market will be able to shrug off a weaker print easily.

Painfully slow process

Painfully slowly, Joe Biden looks like he is inching towards becoming US President-elect. Meanwhile, the US President continued to undermine the validity of the voting process, promising legal challenges. The market is beginning to look forward to 2021 with the tailwinds of a vaccine, more fiscal support, abundant liquidity, with Central banks "doved-up" to the eyeballs.

Masterful inactivity

Fed Chair Powell tried hard (and largely succeeded) to not say much yesterday. The one thing of note was that the FOMC "had a full discussion of the options around the asset purchase program. And we understand how we can adjust the parameters of it to deliver more accommodation". Shifting towards longer maturities would presumably be an easy move in this respect. However, it might conflict with a desire to let optimism express itself in a steeper curve in positive covid vaccine news. 

Oil down but not out

Oil is down due to lingering election uncertainty, and continued worries about spiking coronavirus infections in the US and Europe weigh on sentiment. Balancing this, and keeping Brent above $40/b so far, is a positive messaging from OPEC on the potential for current supply cuts to be extended into next year. There have even been comments suggesting a deepening of cuts might be a possibility. While I would rate this as a meager- chance probability outcome, but the fact it is even being mentioned in oil circles, it is still evidence of a “whatever it takes” approach from OPEC+ that may downside risk for oil. 

In a sign of the times, Royal Dutch Shell has announced plans to start shutting down its Convent refinery in South Louisiana as part of its plans to shrink its portfolio. The refinery current produces around 211k barrels per day and has around 675 employees. This is the latest in US refinery closures, with Marathon and Philips 66 closing sites or converting them into renewable diesel plants.