Wednesday, March 29, 2023

Little To Chew On Post U.S. Presidential Debate


Little For Markets In Final President Debate

The final US presidential debate was less chaotic than the first but offered little new information to inform the result for markets. Meanwhile, discussion relevant to the post-election economic outlook was limited, particularly from President Trump.

Still, Joe Biden’s comments on a “$2 trn clean-energy plan” should support the narrative that the greatest amount of fiscal stimulus would materialize under a Democratic presidency and sweep of Congress. Biden also stressed that he would transition away from the oil industry, which has negative implications for the US energy sector amid broader pro-reflationary trades (e.g., UST curve steepeners, higher industrial metals prices) under a ‘blue wave’ outcome.

US equities were stronger Thursday, recovering 0.5% after the small losses Wednesday. With no breakthroughs on stimulus talks overnight, equities continued their whipsawing pattern. The street is moving too and fro with unwind/rotation in US equities on Thursday, continuing the trend seen over the past two days. More notable action in the bond market, with US yields, lifting a further 4bps overnight to 0.86%, and 30Y results up to 1.68%, highest since early March as term premiums continue to get packed in

Earnings still count

There have been some noteworthy reactions to third-quarter earnings from US industrials stocks again today. Once again, the mixed/poor results getting punished. Indeed, the bar is relatively high for this EPS season as the uncertainty engendered by the election alongside never-ending stimulus headlines leave little room for error.

Trading day views

Markets might continue to trade cautiously in line with the current stimulus-before-election theme. Pelosi and Mnuchin will continue their discussion today. Still, Senator Mitch McConnell made no promises on whether the Senate will pass the compromise agreement even if they do put it to a vote.

Joe Biden’s growing polling lead has coincided with marked outperformance in the Biden win stock baskets. But investors have become incredibly more selective around portfolio positioning as the election day draws near and mull the implications of a possible Blue Wave and, importantly, what a Pro-Cyclical shift will mean for stock markets.

Still, investors struggle as to whether a Biden presidency is Anti-Growth or not. Some days, they give the benefit from the doubt that stimulus is better for everything; however, with some growth stocks struggling in the face of higher long-end rates amid the corporate tax and regulation fears, this may paint an accurate picture of what a possible ‘hard rotation’ out of growth stocks post-election day looks like

Need a Hedge

Suppose you need a good hedge for a pre- or post-election stimulus bounce. In that case, follow the most basic systematic core strategies where perceptible bid on cyclical market dips supports US stocks.

Still Talking

Both sides remain at the stimulus negotiating table as neither benefits from pulling away. But with the Republican Senate unwilling to compromise on the thorniest issues of financial aid to states and liability protections and Pelosi unlikely to hand Trump a victory this late in the game. So, unless a surprise occurs before Friday sundown at the Last Chance Saloon, neither side may be negotiating in good faith.

What Cross Assets are telling us

Still, the cross-asset price action this week paints a clearer picture of what a Democratic sweep scenario could mean—equities mixed on the prospect of higher corporate taxes, yield curve bear steepening on higher fiscal deficit spending also hurting growth stocks, down on the reflationary impulse, and less geopolitical risk on more muted foreign policy response from Biden.

Oil Markets

is trading flat and likely to remain range-bound until a sustainable recovery in demand or all the mobility dominoes topples lower. Because of this, oil prices will continue to be stiffly influenced by news flow about coronavirus, progress on a vaccine, and the US presidential vote.  

The street remains concerned the Kremlin’s latest “oil put” could be nothing more than jawboning to a market that is in desperate need of a COVID lifeline and begging OPEC+ not ramp up too quickly, hence the limited price follow-through.

But Russia has been a  reluctant cutter, so any mention that it is even thinking about a quota extension is significant in the market eye.

But the purpose of these monthly meetings is not to keep the market guessing as the determining factor in OPEC+ decision will be the price/curve shape outcome for November.Currency Markets

The Euro

The “risk-off” mood in European equities continues yesterday, putting a lid on this week’s rally in . Much of the news flow out of Europe remains familiar and concerning. Germany and Italy recorded another record day of new COVID-19 cases, But just as worrying for the Euro were gnarly economic signals out of European data overnight. The French INSEE survey for October was down 2pts, weaker than expected. In the details, the services index fell 5pts to 89 (the long-term average is 100) and back towards its July level, and most forward-looking indicators worsened: expected turnover fell 9pts, expected employment fell 6pts. The flash estimate for euro area consumer confidence in October was weaker-than-expected, suggesting the rebound observed over the past few months might have come to a halt.

Do not forget the ECB is on tap next week. And with COVID cases and activity restrictions rising, the ECB could start hinting at further policy stimulus in December. We get data out of Europe that could help shape the path forward for the board—advanced PMI today could be a critical tradable event, as will next week’s GDP data.

The British Pound

has held onto the bulk of yesterday’s gains prompted by confirmation that Brexit talks would resume. The talks are expected to continue through the weekend, But what little time remains as month-end approaches will dictate whether the EU olive branches translate into an agreement. But a large contingent on the street continues to view GBP’s risks as asymmetric to the downside post these Brexit talks. Still, this week’s bullish GBP response shows that an agreement is not fully baked into the Brexit Party Cake. So, Sterling bears are likely sitting tight, waiting to fade a frothier Brexit bounce.

The Thai Bhat 

Trial tourist groups arrived in Thailand this week, COVID-free. If the next flow of tourists arrives (Oct. 26) without any positive cases, the government stands ready to implement a more relaxed quarantine. has the most to gain from the rebound in travel, with the baht cheap vs. fundamentals due to elevated political risks in Thailand. Yielding to any of the core demands from anti-government protestors will be difficult for the government. Revocation of the severe emergency decree signals some de-escalation.

The Australian Dollar 

Real money had been bearish and unwinding some long AUD hedges. Any buying seen is passive/automatic topping up hedges, in line with the performance of underlying offshore assets. Fast money sees the top in at 0.7150/0.7200. AUD is now around fair value, so there is less conviction directionally. The deviation from the rally might provide an opportunity post-US election.

Japanese Investor Views / Behaviour In JPY

is heavy (with upside limited) due to Fed policy. The core range of 104-106 is seen holding into the US election,  after which time rising US  yields will likely have some sway over the USD/JPY directions. Regardless of the outcome. JPY appreciation provides an opportunity to buy foreign assets, and real money is buying cross-JPY on dips as local Japanese retail. 

Gold Markets

The pre-election stimulus impasse continues to hurt prices, as do higher US yields, 

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