The US equity market is trading near all-time highs in the futures market overnight, as US President Trump’s signing of the stimulus bill removes the last notable political hurdle of the moment, although we are bearing down on important political risks just after the New Year in the shape of the Georgia Senate run-off races  The high market from last week for the S&P 500 is the 3,724 level.

SPX500 H8 12 28 2020 1242


Chinese regulators have demanded Ant to return to its ‘roots’ in payments closing down its businesses in insurance, consumer loans, and wealth management. Very little specifics have been provided and the deadline is specified as ‘as soon as possible’. China is clearly saying no to sprawling technology groups exercising their power across many businesses unified by personal data. Chinese technology companies are becoming a bigger and bigger part of the MSCI Emerging Markets Index and thus the Chinese crackdown could create an unexpected headwind for EM equities in 2021.

Alibaba Group Holding Ltd All Sessions 20201228 12.48

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AUD USD 20201123 12.37

Still watching and waiting here as this is a currency pair the expectation that the global economy can begin to eventually look beyond Covid-19 (and effectively already can now for much of Asia) and that fiscal stimulus will drive inflation and commodity prices higher. The AUDUSD has traded in a very narrow range for over two weeks now as bulls wait for the signal that a 0.7400+ break is unfolding that can shift the focus perhaps all the way to 0.8000+ if the USD is set for a major weakening move. On the flip-side – declining US long yields are a confusing factor here and if this represents a concern on the growth outlook, the reflation trade may yet falter. Still, a breakdown in AUDUSD only looks a threat if the price action retreats below 0.7200. 

AUD USD 20201123 12.38

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Equity markets are off to a cautious start to the week despite a breakthrough in stimulus negotiations in Washington that agreement on a $900B stimulus package. Weighing a bit on sentiment elsewhere, Brexit talks are in a precarious state as the UK finds itself in literal quarantine on the discovery of a new Covid-19 virus strain.

A $900 billion stimulus package agreed by US Congress  but likely set to be signed off by Congress and President Donald Trump in coming days, the new stimulus package includes $15 billion in airline bailout money, extension of $300/week supplemental jobless benefits through March, $600 stimulus checks, but no funds for state- and local government aid. 

US 500 20201221 14.23

The US equity market sold off. The agreement on a large stimulus package over the weekend has not boosted sentiment notably as the last days of 2020 wind down this week and next. Areas of interesting in the S&P 500 index include the 3,700 area, which was near the prior top and seems to be a local pivot level.

Germany 30 20201221 14.23

The reaction of markets last week to Pfizer’s announcement that its vaccine has proved 90% effective in trials gave investors a taste of the potential recovery to come. UK stocks – which have dramatically underperformed their US counterparts delivered their best week since April, with the FTSE 100 gaining 6.9% and the FTSE 250 up 7.6%.

FTSE 100 20201116 15.08


Brexit: if last week wasn’t the week, will this finally be the week we know more? The supposed November 15 deadline for an agreement on the post-Brexit landscape came and went and now this week is being billed as the crunch week for negotiations, although some sources suggest the talks could stretch out longer still. UK Prime Minister Boris Johnson has been distracted with the exit of key advisors and had to self-isolate this weekend due to exposure to someone who later tested positive for Covid-19. GBP doesn’t seem to mind the latest extension of the uncertainty as EURGBP remains below the key 0.9000 level, but it is time for a breakthrough soon.

EUR GBP 20201116 15.09

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Despite recent discussions, trade negotiations between Britain and the European Union remain deadlocked. With Britain set to officially leave the European Union on December 31, no formal trade deals have been made yet, with the leaders of both groups doubting whether a deal will be reached in the near future. The uncertainty created by the current situation saw markets across Europe react negatively over the last week, with investors looking to mitigate what could be risky investments.

A no-deal Brexit has become a much more distinct possibility in recent days, and negotiations are going down to the wire. There is still a huge amount of uncertainty, which means there is likely to be a market reaction whatever the outcome of negotiations. On Friday, Morgan Stanley said that it anticipates the FTSE 250 index will drop by 6% to 10% if the UK fails to agree a trade deal with the EU by the time the current transition deal concludes at the end of December, according to Reuters.

FTSE Mid 250 20201214 15.00

Last Monday saw Tesla reach new highs, with a 7.1% increase in stock value helping the company to become the sixth in history to pass the $600 billion market cap marker. A continued appetite for technology stocks fuelled the positive movement, with Tesla among just a handful of companies to reach the milestone.

Tesla Motors Inc All Sessions 20201214 15.02

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According to US Election Projections, more than 80 million ballots have already been cast, which is 58% of the total 2016 turnout. As a result of these early ballots and mail-in ballots, election day may turn into election week or even election month! The election day is Tuesday. If there is a decisive winner in the swing states, it may be over quickly. However, the loser of the election may bring the results to the Supreme Court citing anything from mail fraud to international interference.

If the US elections are uncertain and drag-on, that may be the only factor driving the markets next week. However, there still are other topics to watch. Most importantly is the reemergence of the coronavirus in Europe and the US. Some countries in Europe, such as Germany, Spain, and France have gone under national lockdown. Other countries have imposed additional national restrictions and curfews, such as Italy and Ireland. The UK currently has localized lockdowns and restrictions. Some speculate national lockdowns may be ahead. Last Thursday, over 500,000 positive cases were reported worldwide for the day, a new daily record. In the US, up until this point, states impose their restrictions on restaurants, schooling, and curfews. However, if Joe Biden wins the Presidential elections, he has said he will implement national restrictions. Which brings us to another issue: the next President doesn’t get sworn in until January 20th. Many hoped for a new fiscal stimulus deal by the time election day arrived. If Trump loses, the US may not see one until February. To make matter worse, if Joe Biden wins the election, but Republicans maintain the Senate, it may take even longer for package to get done.

GBP USD 20201102 19.24

Mid-November is the goal to have a deal in place. However, the BOE cannot wait any longer. The Central Bank will provide more stimulus due to the expected fallout from the new round of coronavirus cases.The central bank currently has rates set at 10bps.

There is speculation the BOE may cut to 0 bps while setting the table for negative rates.The commodity sector has seen a sharp reversal from the strong gains recorded during the past couple of months. Faced with a renewed surge in Covid-19 cases in Europe and the U.S. as well as next week’s ultimate risk event, the U.S. presidential election, it is perhaps not that surprising to see investors turn more defensive.

Oil US Crude 20201102 19.19

Brent crude oil tumbled below $39/b support in response to a bigger-than-expected jump in U.S. stockpiles and renewed lockdowns being introduced in France and Germany with other European countries set to follow suit during the coming week. Overall, however, we suspect that a combination of long liquidation having run its course and vocal intervention from OPEC+ ahead of $35/b may prevent the price from falling much further.

The commodities most at risk being the ones where speculators are holding large and mostly long positions as the focus switches from a long-term bullish outlook to a short-term and more defensive attitude.

Oil Brent Crude 20201102 19.20

USOil D1 12 07 2020 1319

Crude oil reached a nine-month high after the OPEC+ group of producers, following another nail-biting week of discussions, agreed on a compromise deal that will see production rise in stages over the coming months, starting with 500,000 barrels/day in January. With the expected vaccine-driven recovery in global fuel demand this deal will go a long way to ensure the price of oil remains supported until it can stand on its own feet.

The fact that the market rallied despite having priced in a postponement of the previously agreed 1.9 million barrels/day production increase was due to the flexibility of the deal. Meaning that production can be raised but also cut back should the recovery turn out to be slower than expected. Overall, analysts are now expecting that the road towards a balanced market has been shortened and on that basis expectations for higher crude oil and fuel prices into 2021 have been given a boost.

Adding to these supportive developments, a cut this year by the oil majors of more than $80 billion in longer-term capital spending will likely start to feed through to higher oil prices in 2022 and beyond. Unless this past year has changed dramatically the way global consumers will work and travel and thereby consume fuel going forward, only time will tell.  


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The Australian Dollar seems to be pulledin two directions simultaneously. On the negative side is the dovish RBA Governor Lowe speech last week that appears to be a setup for a full QE programme announcement at the November 3rd meeting. On the positive side are the solid bounce-back in risk sentiment and the strong Chinese data overnight, with the weak Q3 GDP numbers off-set by strong September Industrial Production and Retail Sales data. Moreover, the Chinese yuan is trading back toward the cycle highs despite the recent apparent attempt to slow its rise. A move lower in AUD/USD pair here below 0.7000 and AUDJPY below 74.00 may be more up to US stimulus prospects and risk sentiment supporting safe havens rather than any isolated AUD weakness.

AUDJPY D1 10 19 2020 1637

Australian Dollar is in danger to sink

Governor Lowe said last week: “As the economy opens up…it is reasonable to expect that further monetary easing would get more traction than was the case earlier”. In our opinion, the speech suggests a readiness to ease further as the economy continues upon the reopening trajectory with restrictions being wound back gradually and state borders beginning to reopen.

The Governor did flag the potential drawbacks to further policy easing centered around financial stability concerns but went on to emphasize the near term risks to financial stability posed by labor market conditions and private sector balance sheets over the longer-dated concerns surrounding inflated asset prices and speculation. In many ways, echoing recent Fed communique indicating the trade-off between jobs and incentivizing speculation in housing and financial markets. In that trade-off, the labor market alongside progress toward long-term objectives of full employment and meeting inflation targets wins for central banks. With the macroeconomic stability concerns perhaps a job for the likes of APRA.

The Governor also signaled larger central bank balance sheet increases in other countries and the ACGB 10yr yield remaining high on a relative basis. Reasonably a nod to their trans-Tasman fellows at the RBNZ who have been more proactive in their policy responses. Besides, a recognition of the role a weaker currency could play in policy transmission. In our opinion, evidence of a shift toward outright QE with the intent of lowering longer-dated yields. Although the timing of this movement less certain that the lowering of the cash rate, YCC target, and TFF rate in November.

The final dovish pivot was again a nod to a recent communique from the Fed centered around enhancing dovish forward guidance and committing “big” to inflation. The Governor signaled a shift toward “putting a greater weight on actual, not forecast, inflation”, in our view committing to not raise the cash rate until actual inflation is within the 2-3% target range. A shift that mirrors the Fed’s recent pivot toward average inflation targeting (AIT). Validating that the Australian economy will be left to run hot before the board raises the cash rate.

Taken together the commentary signals a readiness to continue to support the revival via additional easing of monetary policy, with little reason to wait. As such, we expect at the next board meeting in November a 15bp cut in the cash rate, YCC target, and TFF rate to 10bps. However, the timing of an outright QE package could possibly be extended into 2021.

The RBA may hold fire on the outright QE package, monitoring the evolution of household and business spending throughout the December quarter as government assistance becomes more targeted. Perhaps holding back on the launch of an outright QE package until Q1 of 2021 in a bid to cushion the fiscal cliff set to emerge as support rules are wound back.

AUDUSD D1 10 19 2020 1636

More US stimulus?

The US stimulus question may finally be nearing a

near-term resolution as the weekend saw US House Speaker Nancy Pelosi issuing a 48-hour deadline (apparently Tuesday night) for a stimulus deal if anyone expects something to pass before the election. Some Republicans are willing to burn bridges to Trump due to the Democrats’ commanding lead in the polls and at odds with the president on whether a big stimulus package is advisable. The headlines suggest that stimulus prospects are still strong. Even when they appeared less strongly recently, the narrative seemed to be that the rising odds of a Democratic clean sweep of Congress and the presidency at the election will mean a far bigger package will be coming by spring either way. The market feels somewhat complacent here, and there is room for a mishap on the stimulus front that sees another modest leg higher in the US dollar, but confidence in reading the market here is low.

US Dollar Basket 20201130 13.30

The US dollar is perched near the final support levels in a number of USD pairs ahead of Fed Chair testimony later this week and a busy economic calendar through the Friday payrolls and employment data. But global animal spirits are likely the more important drive in determining whether the US bear trend is set to deepen here.

Exchange rates are awfully quiet these days, but the directional move lower in the US dollar has finally extended enough in recent days to take the greenback to key levels that tell us whether a proper trend is unfolding here.
Most interesting scenario to challenge the weaker US dollar would be strong economic data that inspires higher US yields , range bound or lower yields with strong risk sentiment keep USD bears comfortable.


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The second economic crisis in just 12 years, coming as the wound from the first crisis has healed, has pushed policy to the event horizon of the macro. Never in history have global interest rates been pushed so hard towards zero. Moreover, there are massive increases in fiscal deficits on top of historically high debt levels.

Aggressive policy action in the first half of 2020 by central banks and governments has engineered a strong rebound in equity markets. The general belief is that humankind will overcome the Covid crisis with less damage than from the financial crisis in 2008. Global equities have fully succeeded to recover their losses during the pandemic’s first wave. However, the global corporate earnings collapsing by 56% – catapulting the P/E ratio to 27.7x at current price levels.

Expectations are high. Estimates suggest a 106% jump in quarterly earnings, which will then continue to climb until reaching a new all-time high in the fourth quarter of next year. If the corporate sector delivers this rebound in earnings, the global equity market will be valued at 19.3x earnings in 2021. Not an unreasonable valuation provided the alternatives in bonds.

iShares Core MSCI World UCITS ETF 20201012 12.30

Will the US economy be back into growth?

The New York Fed Weekly Activity Index, a real-time tracker of US economic growth, has revealed a V-shaped recovery since late April: although it is still at -5% as of mid-September. At the current trajectory, the US economy will be back into growth territory before the year-end.

The number of permanent job losses has jumped from 1.2 million before Covid to 3.41 million in August 2020. This is high but still, nothing compared to 2008. The number of job losses then jumped from 1.49 million to 6.82 million (and that was from a lower labor market size than today). According to CPB, world trade volume rebounded 7.6% m/m in June and is on track to continue the rebound. This indicates that things are normalizing, even though global trade is in its worst period since the GFC.

US 500 20201012 12.38

All eyes on inflation and volatility

According to our analysis, there is the probability of a rebound of corporate earnings to pre-Covid levels within the next 18 months, but the long-term growth rate from that point on is much more uncertain. In both financial markets and the economy, the two most important factors for investors over the coming decade will be inflation and volatility.

US equities may start the week on hopes that a stimulus deal will be forthcoming and as US earnings season is set to get underway in earnest this week with the large financials in the spotlight. Most Fibonacci retracements have fallen on this latest rally as the focus will soon shift to the all-time highs for the major indices – for the Nasdaq 100 at 12,423 and the S&P 500 at 3,576. 

US Tech 100 20201012 12.38

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