Is This The October Surprise?


Overview

Before a US election, there is often speculation of a last-minute game-changing development. News earlier today that the US President and his wife have tested positive for the COVID-19 virus has injected a new unknown into not only the US election but the markets as well. Many centers in Asia (China, HK, Taiwan, South Korea, and India) remain closed, while Australia and Japan surrendered early gains. European shares have recouped some of the initial sharper losses, and near midday, the Dow Jones Stoxx 600 is off about 0.6% to hold on to about a 1.2% gain for the week. US shares are around 1.2% lower. The bonds are not drawing much of a safe haven bid. The US 10-year benchmark yield is around 67 bp. European yields are off slightly, though Italian bond yield is off a bit more as it dips below 80 bp to new lows. The dollar is mostly firmer. Sterling and yen are notable exceptions, while the Australian dollar is snapping a four-day advance to lead the decliners. It is paring this week’s gains by about 0.5%, leaving up about 1.6% on the week. Emerging market currencies are trading with a heavier bias, led by the Russian rouble and Mexican peso. The JP Morgan Emerging Market Currency Index is off about 0.15% and is up around 0.5% for the week. Gold is steady after approaching a nine-day high earlier (~$1917), while oil is slipping lower. The November WTI contract making new lows three-week lows near $37.20 a barrel. It is off about 6.7% this week after last week’s 2.6% fall.

Asia-Pacific

Japan’s jobless rate ticked up to 3% in August, a three-month high from 2.9%. The job-to-applicant ratio deteriorated to 1.04 from 1.08. It reinforces the idea that after a strong start to Q3, the Japanese economy lost some momentum. Meanwhile, as we have anticipated, Prime Minister Suga is moving toward another supplemental budget. It would be the third, and the local press is reporting it to be ready near the end of the year or January.

Australia reported that August retail sales fell by 4%, a little less than expected. It more than offsets the 3.2% gain in July, and is the first decline since April’s 17.7% plunge. The new spread of the virus and lockdown of Victoria was the main drag.

The dollar fell to lows for the week against the Japanese yen, briefly dipping below JPY105 in the initial reaction to new of Trump’s contraction of the virus. It held the JPY104.90 level, where a $410 million option is set to expire. It recovered to trade back at the lower end of what had been this week’s range around JPY105.20. Another option (~$765 million) is struck at JPY105.50 and is also set to expire today. The Australian dollar is off about 0.4% to snap a four-day rally that had retraced about half of its September losses. Its drop today to almost $0.7130 meets the (38.2%) retracement objective of the recent gains. Mild support near $0.7150 is seen in the European morning, and a move above $0.7180 would be constructive for next week.

Europe

The eurozone’s inflation challenge remains. The preliminary September figures delivered the 0.1% month-over-month gain that was widely expected. The year-over-year rate, however, at -0.3%, was a touch weaker than expected, and the core rate slipped to a new record low of 0.2% from 0.4%, which was not anticipated. The low inflation is the thin edge of a wedge that is expected to be used to settle the debate between the region’s creditors and debtors. The former is looking to end the emergency stimulus as soon as the emergency is passed, while the latter looks to avoid repeating past mistakes and removing stimulus too early. The rubber meets the road at the December ECB meeting, when the bond-buying program is expected to be extended.

Speculation yesterday that a breakthrough had been achieved in UK-EU trade talks sent sterling to a two-week high near $1.30 before a cold slap of reality set in and sterling was sold back into the $1.2860-1.2880 area. Talks between Frost and Barnier continue today. UK Prime Minister Johnson and EC President von der Leyen will hold direct talks over the weekend to map out the path forward. The two outstanding issues remain state aid and EU fishing rights in UK waters. The price action clearly showed buying on the rumored break-through, which we suspect to be, in the first instance, short-covering. It shows the market expectations are pessimistic. There are other drivers, including the second strong wave of the virus and the Bank of England likely to ease policy next month, that also need to be weighed.

The euro dipped below $1.1700 on the news from the US, and quickly bounced but stopped shy of the $1.1750 level, where a 2 billion euro option is set to expire today. There is also a 1.3 billion euro option at $1.17 that will be cut today. Support extends to $1.1670. Near-term conviction has been undermined by the recent developments. We suspect that one implication is that if there is a strong reaction to the US employment data, it may be faded. Sterling is trading within yesterday’s range (~$1.2820-1.2980). It is encountering selling pressure in the European morning near $1.2950. There is an option for about GBP200 million at $1.29 that rolls off today.

America

The US President and First Lady have tested positive for COVID-19. It is a tragedy and could have far-reaching implications. Some are already speculating what it means for fiscal efforts and for the election that is a little more than a month away. Some observers talk about a sympathy vote, as UK Prime Minister Johnson saw a bit more support when he became infected. Most polls had Trump trailing Biden overall and in most of the swing states. At first blush, we suspect that it is not a game-changer for the election or for the trajectory of fiscal policy.

Back in the 1980s, as Lighthizer wrestled with the Japanese, who was said to be responsible for the US external imbalance, the monthly trade report was elicited the biggest response from the foreign market. In 1985, the year the US helped arrange the Plaza Agreement to drive the dollar lower, it recorded an annual trade deficit of $114 billion. It peaked a couple of years later around $144 billion. The August trade balance will be reported on October 6. If the median forecast is close to the money, the US would have recorded almost $130 billion trade deficit in July and August together. It has lost its sting. For years, it seems that the monthly jobs report has the biggest impact. It is the first broad glimpse into the economy in a new month in terms of hard data. It is difficult to forecast. However, it may also be losing its sting.

The median forecast is for an 875k rise in non-farm payrolls. Investors learned yesterday that 837k Americans filed an initial claim for jobless benefits, and another 650k applied for the Pandemic Unemployment Assistance program. It is true that they are non-measuring the same thing, but six months after the pandemic struck and around four months since the economy began recovering, the number of people filing for unemployment benefits is four times what it was pre-crisis. No matter what today’s employment report shows, there is a deep conviction, reinforced by the recent slew of corporate lay-off announcements, including a couple of airlines and a few large banks, that the labor market remains stressed. What improvement there is appears to be slowing, and a better sense of what are permanent and temporary lay-offs become clearer. Through September, it looks as if around half of the employees returned to their jobs, which is also what the participation rate will likely show.

At yesterday’s low below CAD1.3270, the US dollar neared the (38.2%) retracement objective of the September rally. The risk-off mood has seen this area hold, and the greenback recovered toward CAD1.3330 today. Resistance is likely in the CAD1.3345-1.3360 area. If this is overcome, it would signal a likely re-test on the cap near CAD1.3420. The greenback dropped around 2.8% against the Mexican peso in the last two sessions but has come back in light of the developments. It had approached the 200-day moving average (~MXN21.77) yesterday and is holding below yesterday’s highs (~MXN22.13). A move above yesterday’s highs could spur a move toward MXN22.25-22.35.

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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