Markets
Markets yesterday positioned for a blue democratic sweep in the US election race. A Biden victory combined with a Democratic Senate majority could pave the way for huge additional fiscal stimulus to support the economic recovery. This resulted in an outright risk-on repositioning. European and US indices closed up 2.0%+ higher with the Dow slightly outperforming. The US yield curve bear steepened with yields rising between 1.2 bps (2-y) and 6.4 bps (30-y). German yields added a more modest 2 bps. The steeper US yield curve/reflation trade weighed on the dollar. EUR/USD returned north of 1.17 (close 1.1715). The TW dollar dropped well below the 94 reference (close 93.55).
The reflation initially continued overnight. The US 10y yield spiked temporary north of 0.90%. However, markets soon understood that a clean Democratic sweep would be far less evident than anticipated. The presidential election race is becoming a very close call and in might take quite some time before the final/decisive result will be available. This also applies to the result for the US Senate. The indecisive picture caused a sharp fall in US yields and a rebound of the dollar. Chances/risks clearly have grown that the bickering on a well-structured fiscal package will continue also after this election. The US 10y dropped from 0.90%+ levels and currently trades again near the 0.80% previous range top. The dollar reversed most of yesterday’s gain. In volatile trade, the TW-dollar returned to the 94 area. EUR/USD spiked to 1.1612 support and currently hovers in the mid 1.16 area. Interestingly, there is no strong bid currently for the safe haven assets like gold ($ 1900 p/oz). The yen also weakens against a broadly stronger dollar (USD/JPY 105 area). Brent oil is holding most of yesterday’s gain (Brent $ 40 p/b) Equity markets show a mixed picture. Most Asian equites are holding on to modest gains with Japan outperforming. European futures currently suggest a (mildly?) negative open. US futures show modest gains with the Nasdaq outperforming. The yuan initially spiked sharply lower as a Biden/democratic victory becomes less likely. However, most of this loss is already reversed USD/CNY trades again in the 6.6950 area.
Markets will continue to look for clarity later today, both on the presidential vote and on the outcome of the Senate. It is unsure whether this uncertainty will be solved anytime soon. In this respect we expect markets to take a more cautious approach. European markets even might shift to a risk-off modus. Uncertainty on the process to reach an agreement on a fiscal package might gradually weigh on US risk sentiment too. In this context, core bond might remain well bid. The US 10y yield could drop back below the 0.80% handle. The German 10y yield is at risk of retesting (or even breaking) -0.64% support. The picture for the dollar is unclear, but short-term the US currency might regain the benefit of the doubt. The risk of a test of the 1.1612 support is growing. In case of break, the 1.1495 March top is a next reference. Eco data include the US non-manufacturing index and the ADP labour market report, but they probably will be overshadowed by the election noise.
News Headlines
The Chinese Caixin (private) services PMI extended its recovery to a higher-than-expected 56.8 in October (up from 54.8), the second highest since 2010. New orders accelerated and companies added payrolls for a third month straight. The composite PMI advanced to 55.7, also the highest level in a decade.
Australian retail sales advanced 6.5% q/q in the third quarter vs. 6% expected. The rebound comes after a lockdowndriven slump in Q2 of -3.4% and suggests a solid contribution to Q3 GDP growth. Yesterday however, the RBA provided more monetary easing, warning the growth pick-up could already fade in the current quarter as uncertainty continues to weigh on the economy and labour market.
