An action-packed week is off to a strong start on Monday, with European indices reversing earlier declines to rally more than 1%. Wall Street is poised for a similarly strong start.
This comes despite an enormous amount of event risk this week, not least the US election on Tuesday. With more than 94 million votes having already been cast ahead of election day - 68% of the 2016 total - it promises to be a huge turnout.
It’s perhaps surprising that we’re seeing the kind of moves we are, given what’s to come, but these markets have factored in a lot of negative developments over the last few weeks so in the grand scheme of things, these moves are pretty negligible.
Broadly speaking, we may see investors taking to the sidelines as we await early results from the election. Not only who’s going to be sat in the White House for the next four years, but who’s going to dominate the Senate, arguably equally as important if Joe Biden wants to deliver on his big promises. Assuming of course that the polls are to be believed.
It’s not just the election that’s key this week. We have three major central bank meetings - the Fed, BoE and RBA - all of whom are likely to ease monetary policy before year end, alongside others. Central banks were key to the response earlier this year and will have a big role to play in round two.
Then there’s the jobs report on Friday, which doesn’t even make the top three as far as major market moving events this week are concerned. With Congress failing to pass a stimulus package prior to the election, the jobs numbers will get extra scrutiny in the coming months as we try to determine the cost of the failure on Capitol Hill.
In a sign of how chaotic this week is, we’re into paragraph seven before I’m even referencing Covid and the havoc it’s wreaking across Europe. The UK will join the list of countries in national lockdown on Thursday and it’s only likely to get longer.
The desperate attempt across the continent to save Christmas is underway but health officials don’t seem particularly confident it’s going to be enough. Life is likely to be very restrictive until early next year which is going to take its toll on economies around the world.
Of course, China seems to be doing very well indeed. Not only is it containing the virus, it’s economy is thriving as evidenced by the PMI readings over the weekend and this morning. Perhaps this is supporting sentiment this morning as a strong Chinese economy has benefits for others, European manufacturers for example.
The manufacturing PMIs from across Europe this morning highlight just that, with the growth not being replicated in the services sector as restrictions act as a major drag on the sector. That’s not going to change any time soon, with restrictions rapidly choking off any recovery we saw in the third quarter.
Dollar flat but remains a favourite
It’s been a little choppy so far today but the dollar is pretty flat at the start of the week. The greenback has been a reliable safe haven this year and last week was no different. Given the level of uncertainty we could see this week, we may see the dollar remain in favour, even as it closes in on the September peak.
The dollar rebound is taking the edge off the sterling comeback, even as talks between London and Brussels progress well. There aren’t too many noises coming from the negotiations which is encouraging and suggests the time for fighting this out in public has passed and the hard compromises are being made.
The pound is making steady progress against the euro in recent weeks and has found some support around 0.9. A deal should deliver further gains for the pound but upside may be limited by the fact that it’s now assumed an agreement will be struck.
As far as the pound is concerned, whether the UK achieves a Brexit deal will have a significant impact on the economic outlook but unfortunately, it’s not plain sailing if a deal is achieved. The UK fared worse than most during the last lockdowns and given the importance of the services industry, we may see that again over the winter.
The Bank of England is expected to at least signal more easing on Thursday, if it doesn’t pull the trigger on the spot. The fact that it’s producing new economic projections in many ways makes it the logical time to do so, but then the next six weeks could bring massive changes to the outlook so it may be more sensible to hold off until December, as others are expected to.
Oil crushed under pressure of lockdowns
Oil is getting crushed once again, with the latest Covid restrictions in Europe taking a heavy toll on crude prices. There’s a massive imbalance forming in the supply/demand outlook which is weighing heavily at the moment, as we await a response from OPEC+.
The group has previously signaled a willingness to respond in the event of more lockdowns and the time has come for just that. Market pressures are not going to ease, even if prior warnings cushion the blow to an extent.
Brent and WTI have both pulled off their lows this morning as sentiment in financial markets has improved but their coming off a low base. Brent is almost 20% lower than it was a couple of weeks ago and the lowest it’s been since mid-May.
If OPEC+ don’t respond soon, the pressure will continue to increase and both Brent and WTI could find themselves closing in on $30 a barrel once again. The group can only sustain so much and these lockdowns are only going to spread further. It’s not a case of if they’ll push back production increases, it’s now a case of when.
In terms of notable levels, the next major support for WTI is $33, with $30 being a major psychological level below that. For Brent, $36 represents a big test - one it passed earlier today - but $33 is the bigger challenge.
Any rallies may be tested by the sellers and, should it get that far, $37 would be a major barrier to the upside in WTI, with $40 posing a similar challenge for Brent.
Gold support passes first test
Gold has found some support in recent days around the late/post-summer lows. The region around $1,850-1,860 has been key for the yellow metal during that period and a break of it would be a major psychological blow in the near term.
Nothing has changed about my medium to long term outlook, as far as gold is concerned, but the downside risks remain significant and election uncertainty will only add to that. Covid is sucking optimism out of these markets and weighing heavily on risk assets and gold is being taken down with it.
A move back above $1,900 would be a positive move for the yellow metal but I don’t think it fundamentally changes the outlook. It’s one barrier to the upside but only a move above $1,930 would represent a significant shift in momentum.