The next couple of weeks will be crucial to how we end the year in financial markets, and investors are standing by, waiting to respond. It’s deal-making time, with months – or in the UK’s case, years – of negotiations coming to a head as the clock ticks down. The U.S. election is in the final stretch, and every passing week brings us one step closer to a COVID vaccine. A huge amount of event risk will ensure it’s a fascinating end to an otherwise horrific year.
U.S.
In addition to the Nov. 3 election, the focus in the U.S. will fall on the advance reading of GDP, the COVID-19 spread, and big tech earnings. The U.S. economy is expected to post a record-breaking rebound in economic growth in the third quarter. The Q3 growth measure is expected to rise 32.0%, erasing away the 31.4% contraction seen in the prior quarter. This is the last big data release before the election and could influence some voters on the direction of the economy.
The virus spread is intensifying in the U.S. and record high cases seem very likely. The third wave of the virus continues to cripple the Midwest, but hospitalizations are not rising as sharply as many younger individuals are getting exposed. For now, the U.S. has not seen anything close to the lockdown and restrictive measures happening in Europe, but that could change if another surge happens.
The third week of earnings season heats up with some mega-cap tech results from Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN). Close attention will also fall on industrials and transport earnings reports from General Electric (NYSE:GE), 3M (NYSE:MMM), Airbus (PA:AIR), Boeing (NYSE:BA), UPS (NYSE:UPS), Caterpillar (NYSE:CAT) and Honeywell (NYSE:HON).
U.S. Politics
It is all about the Senate race. President Donald Trump had a strong performance in the final and civil debate, but it was not likely enough to move the needle. Former-VP Joe Biden did not have any major slip-ups, although some will argue his oil statement was an unforced error. Biden did a good enough job to keep his lead intact. Trump will likely see a bump in the polls, but with almost a quarter of the vote likely in and the number of undecided voters being in single digits, Wall Street can continue to price in a Biden victory.
Just as important is the Senate race, and that will likely take a big queue after the confirmation of Amy Coney Barrett to the Supreme Court. Biden has stated he will come out with a clear position before Election Day about where he stands on expanding the Supreme Court. This could be the biggest risk to the blue wave. Republicans who disapprove of Trump may want to vote red for the Senate to keep the conservative majority on the Supreme Court. Several Senate races are up for grabs and it appears we won’t have a clearer picture until after election day.
EU
The ECB meeting next week could lay the groundwork for more easing in December as the euro area economy flirts with a double-dip recession. COVID is wreaking havoc once again, which means more restrictions across the bloc. This is particularly taking its toll on the services sector, with manufacturing performing relatively well, aided by the economic rebound in China. Policy-makers have kept a lid on the euro after Christine Lagarde’s blunder in the last press conference, and easing hints next week would go some way to easing deflationary pressures for now.
Brexit
Negotiations are back under way, with Michel Barnier arriving in London on Friday promising to intensify talks and work towards a deal, one based on mutual compromise. This follows months of both sides pushing the other for concessions and, it seems, last week’s post-EU summit comments were a step too far. Neither side can be seen to be getting a raw deal and comments from Barnier in recent days have convinced Number 10 to return to the negotiating table. A breakthrough now looks possible that will enable both sides to claim a success and avert no-deal. Interestingly, sterling never came under much pressure in response to talks breaking down, with traders clearly having had enough of political theatre and empty threats of the last four years. There is clearly more optimism now though that the foundations are in place for compromise and a deal in the coming weeks.
UK
The UK is continuing to see rising COVID cases and hospitalizations forcing tighter restrictions around the country. The situation is going to get much worse before it gets better, which is going to be a drag on the economy. Expect more stimulus from the Bank of England this year. Brexit remains a huge downside risk for the economy but negotiations took a significant step forward this week.
Turkey
The CBRT has a real credibility issue and recent actions haven’t helped. The currency hit new record lows against the dollar this week, bringing losses for the year to 25%, as the central bank refrained from raising interest rates, despite markets expectations of a 175 basis point hike. They appeared to have engaged on a tightening cycle last meeting in order to stabilize the currency and address inflation issues but this week showed it still prefers to tighten conditions using other means. Clearly politics is continuing to play a role in the decision-making and that comes at a cost for the currency and, ultimately, the economy.
China
China Communist Party plenum runs Monday to Thursday to set new 5-year plans. Potentially important policy releases to come on Friday.
China Industrial Profits Tuesday should continue the growth tone of recent data, supporting the CNY and China equities.
Ant Financial IPO opens Tuesday-Thursday with payment Nov. 2. Potentially strong tailwind for China tech stocks next week.
China Official PMIs released Saturday, Oct. 31, followed by Caixin PMI Monday 2nd. Main risk is disappointing numbers that could lead to a large fall in equities Monday, Nov. 2nd.
Hong Kong
All eyes will be on the Ant Financial IPO this week, which will open and close this week with trading starting after the Nov. 3rd US election. Bullishness on IPO should mollify any risk based selling ahead of the US election.
USD/HKD at the bottom of its trading band with heavy buying from the HKMA. The demand for HKD is due to the Ant Financial IPO this week.
HK GDP and BoT expected to show the real economy remains deep in recession with Cathay Pacific announcing massive layoffs this week.
India
No significant data this week.
Indian Rupee continues to weaken after appalling GDP data. Rampant COVID-19 continues to crush economic activity and India’s potential recovery. Weak BoP, monetary and fiscal positions with stagflation potentially India’s biggest headache. Continues to be Asia’s weakest link along with Indonesia.
New Zealand
Landslide victory for Labour at elections boosted NZ dollar. Equities mostly unmoved. No significant data this week.
RBNZ continues to telegraph negative rates and the NZ dollar could come under sustained pressure this week ahead of the U.S. election as risk is taken off the books globally.
Australia
Australian markets shrug off reports of China coal bans now, focusing on a potential rate cut from the RBA on Nov. 3rd. COVID-19 restrictions eased. Financials and resource sector outperformance to continue.
Copper and iron ore remain near year highs supporting the resource sector and offsetting China’s bans in minor Australian export sectors. Australian markets will remain resilient unless China starts messing with copper, iron ore or LNG. Unlikely at this stage. The rise in risk aversion tensions is threatening to flip the Australian dollar into a potentially large downward technical correction. This remains the major risk factor next week.
Australian Dollar and equities may suffer downside pressure this week as risk is reduced globally ahead of the US election. That should be a temporary state of affairs though. The lucky country should remain lucky with domestic data showing recovery remains on track.
Japan
Japanese Yen rallies strongly on haven demand from onshore investors ahead of the U.S. election. USD/JPY could potentially fall to 102.50 ahead of the election, especially if the U.S. Senate result is too close to call, or odds of contested election increase.
Heavy data weal with Leading Index, Retail Sales, Tokyo CPI and Industrial Production. All are expected to underperform as Japan’s domestic and export recovery remains sluggish in contrast to Taiwan and South Korea.
Bank of Japan rate decision on Thursday. Unchanged at -0.10%, but a high chance of increased measures to pump money into the economy via lending facilities, and potentially an increase in JGB buying. Yen negative theoretically, but repatriation flows will subsume. The BoJ should be equities positive offsetting risk reduction flows into the U.S. election.
Oil
Oil prices were given a big boost on Thursday, as Vladimir Putin refused to rule out postponing production increases planned for January by OPEC+. This was by no means a commitment to do so, nor an acknowledgement that it had been discussed, but his openness to it has been welcomed.
OPEC+ cuts remain at 7.7 million barrels but are scheduled to fall to 5.7 million in January. This is a significant increase that could hit oil prices if the global economy falters in the coming months, as many expect, due to COVID-related restrictions. At this time, the group sees no reason to delay anything but that view may change between now and December, when they’re scheduled to meet and Russia will be critical to any delay.
WTI is back above $40 on the comments which, as we’ve seen so often before, could simply be a simple means of manipulating prices in their favour in the near-term. But if not combined with action, should demand slip as expected, it will only be a short-term boost. Brent continues to see considerable support around $41.80, with WTI seeing it around the $39.50 region.
Gold
There isn’t an enormous amount to add on gold in recent days and weeks. The yellow metal continues to hover around $1,900, as we await movement on some of the major risk events that are coming to a head in the coming weeks.
Momentum is just about with the bulls, despite gold spending a little time below $1,900 yesterday, but ultimately, the next move will be event driven and that will probably come from the stimulus talks on Capitol Hill. We may not have to wait too long for movement on that front. A close below $1,900 may signal that talks are collapsing, with a break above $1,930 perhaps meaning good news from Washington.
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