Financial markets in calm waters
Sometimes there is just not a lot to say about the markets, especially when they settle into a range-trading mode. This appears to be one of those days, and if we strip the noise out, we could extrapolate that over the past few sessions. The temptation in such circumstances is for the market too, increasingly desperately, to find stories to justify the nuanced moves of a ranging market.
A deadlock on the US fiscal stimulus talks has been offset by hopes that common sense will prevail, and some sort of deal will be done, even though it will come too late for the 3rd November US elections. The US elections themselves are not providing much in the way of headline risk. The street both comfortable and having priced in a Biden win at this stage. Only a swing of the polling needle back towards the Republicans will increase uncertainty. The US presidential social media account is quiet by his standards, and it is this concern that has killed volatility in Asia this week. With both of the above, that situation will almost certainly change, but perhaps not this week.
China’s President Xi Jinping’s keynote speech in Shenzhen yesterday disappointed as well, to some extent. It was heavy on rhetoric, but light on new initiatives and at the end, not market-moving for Asia at all. Afterwards, mainland stock markets retreated slightly yesterday.
Financial markets are, for now, ignoring the second wave of Covid-19 now sweeping Europe and the United Kingdom. Along with its negative implications for the global consumption picture and the European recovery upon which so much has been positioned. Partial lockdowns are appearing all over the continent, but it seems markets will only react if national ones are reinstated. National lockdowns in developed markets have always been one of my key risk factors for the global recovery. Those risks are growing in Europe.
Financial markets appear far more focused on the UK and Europe Brexit trade negotiations, with the UK’s self-imposed deadline for an agreement occurring today. However, it appears that the UK prime minister has had his bluff called and will continue talking to the Europeans after all. As with the US fiscal stimulus discussions, financial markets continue assuming that common sense will prevail and a deal will be done. That reflected in sterling overnight, one of the few instruments that actually moved. GBP/USD rose 0.60% to 1.3115 with EUR/GBP falling 0.70% to 0.9025 on trade agreement optimism. Like the US fiscal stimulus discussion, I dread to see the correction of either or both fail.
In Asia, Australian employment disappointed this morning, with full-time jobs and the participation rate both falling slightly. The AUD/USD has fallen 30 points to 0.7135 as a result, and it may be that Australia has harvested the best of its post-Covid-19 peace dividend on the employment front. Much will now rest on the stimulus measures that the federal government throws at the economy.
A similar argument could be made for the US with the release of Initial and Continuing Jobless Claims this even. With federal stimulus cheques long gone, the rate of improvement on both metrics has stalled over the past weeks. Initial claims remain stubbornly above 800,000, and continuing claims remain stuck around 10.75 million. Disappointing data tonight could move the needle into the red for the US, with Senate Republicans obsessed with Supreme Court appointments to the detriment of fiscal stimulus.
Patience is a virtue in markets such as these and ignoring the incessant intra-day noise takes discipline. But patient we must be ahead of US data this evening. For all else, there is presidential tweet risk.
