OPEC+ Facing Hard Choices

Brent and WTI January contracts rallied more than 7% last week and have risen by more than a quarter in November.

The rally has been driven primarily by Covid-19 vaccine news in which three giant pharmaceutical companies are likely to deliver the cure to the current pandemic. Steady increase in oil demand from Asia, a weaker US dollar and easing political uncertainty in the US as President-elect Joe Biden began his transition process have also helped boost sentiment. However, it’s now in the hands of OPEC+ to determine whether oil prices remain close to $50 or they get dragged lower towards the low $40s.

Back in April, the coalition agreed to cut production by 9.7 million barrels per day and have scaled it back further to 7.7 million bpd since August. The original plan was to then bring back another 2 million bpd in January 2021, but markets seem convinced that this step will be delayed. The question remains for how long?

While fuel demand in Asia has returned close to pre-pandemic levels, we are still far away in Europe and the Americas. That would make it a challenging choice on whether to delay or bring back more oil to the market. At this point, OPEC+ members won’t just be trying to balance supply and demand, but also bring back global inventory levels to their long-term averages. Given the increase in Libyan production, inventories are set to rise again if the group sticks to their previous plan.

Oil bulls would like to see an extension of the current reduction of 7.7 million bpd for another 6 months. However, this could come at a cost of losing market share to the US shale oil producers. American rig counts have been steadily increasing since mid-September and the further prices go higher the more rig counts are likely to be added. In the week ending 25 November, rig counts stood at 320, up from 244 in mid-September. That is the challenging situation OPEC+ will have to deal with.

Other than rising prices, last week saw an additional positive development in which January Brent futures traded at a premium to those of February, in what’s called ‘backwardation’. This situation usually denotes tighter conditions and is seen as a positive signal. However, it lasted only for four days before returning to ‘contango’, so we cannot read much into this unless the curve flips for a longer time period.

Making things even more complicated for OPEC+ is that the recovery pace in road fuel demand versus jet fuel demand remains sluggish. The coalition cannot target a specific grade or product but only crude in general.

It’s clear that OPEC+ has more work to do and markets need to be convinced the coalition will successfully manage production in which global inventories continue to shrink. Our base case scenario is to see an extension of the current production cut for three months, which may then be extended for another three. This could keep prices around the high $40’s for December and possibly mid $50’s in the first quarter of next year. Any surprises or cracks in the alliance would deliver a negative shock.

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Vaccine Rally Cools as Markets Look to Economic Data

US equities reached new highs on Tuesday with the Dow Jones Industrial Average breaching 30,000 for the first time, having added 12.7% month-to-date. The UK’s FTSE 100 performed even better with gains of 14.6% as many of its components benefit from a global recovery. Meanwhile, in Japan the Nikkei index hit a fresh 29-year high.

The global rally seems to have paused for now, following a modest decline of 173 points in the Dow Jones Industrial Average and 0.16% retreat in the S&P 500. The fall was driven by the sectors which have benefited the most from the vaccine news, such as Energy, Basic Materials, Industrials and Financials. However, the Nasdaq Composite ended Wednesday up 0.47% as investors flocked back to the big Tech names.

Markets seem to be repeating the cycle of the past two weeks. Vaccine news gets released on a Monday and pushes cyclical stocks sharply higher, while growth stocks get dumped. We then see a reversal in positioning in the latter part of the week. While the release of vaccine results is promising, we do not know yet when this pandemic will be completely over and that is what investors will continue to struggle with. Wednesday’s economic data showed that US jobless claims increased for a second consecutive week suggesting more pain ahead as business restrictions and partial lockdowns continue to hurt employment. Consumer spending remains a bright spot having increased 0.5% in October, but given the 0.7% decline in personal income, there is a high chance that these numbers soften in the final two months of the year.

Minutes from the FOMC’s most recent meeting earlier this month indicated that monetary policy is likely to remain accommodative and officials will provide further guidance on bond buying. The central bank is not expected to take any steps to upset the market, and it’s evident that we’ll continue to live with a low rate environment for a couple of years. However, the economy is now in need of a fiscal boost and not a monetary one. The faster the US government acts, the more jobs it will preserve and the faster activity can return to pre-Covid era levels. Time seems to be running short to pass a bill before year-end, but that is increasingly necessary in order to prevent further shocks to the economy and hence markets.

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Markets Celebrate The Return of Normalcy

Global equities are celebrating the outcome with the MSCI All-Country Index heading towards a new record and the S&P 500 futures rising 1.7% following a 7.32% rally last week.

While the control of the US Senate is still to be determined, markets are reacting as if Republicans will continue to hold this part of Congress. If this is true, taxes are likely to remain at current low levels and interest rates will stay near zero for a long time. That is the best environment for growth stocks, particularly the tech sector. Hence, they are continuing to outperform the broader market.

With expectations of a massive stimulus package lowered and the Fed now the ‘only player in town’, US bond yields will continue to come under pressure. The Dollar won’t benefit from widening yield spreads and that has dragged the DXY to its lowest levels since early September. Significant moves have also been seen against the Yuan. The Chinese currency is trading at its highest level since June 2018. The narrative now is that Biden will take a softer approach against China, or at least a more predictable one.

A combination of fewer trade tensions and low US interest rates is encouraging inflows into high beta currencies. The Australian Dollar is hovering around 0.73, while the New Zealand Dollar reached 19-month highs.

Assuming no big surprises interrupt the market’s celebration, this trend is likely to continue until year end and possibly beyond. When the party is over, investors will realise that corporate valuations are extremely high and we’re still dealing with a health crisis.

Sky high valuations can still be justified in the short run given that very few investment alternatives are available. Stocks are still cheaper than bonds from a pure valuation perspective. But it is the health crisis that will determine the trajectory for assets in 2021 and how fast the global economy will recover going forward. Gold could possibly be a good hedge against those unknown factors and I wouldn’t be surprised to see the precious metal trading above $2,000 by year-end.

Given where we stand now, it seems highly unlikely that we will see asset returns anything near the Trump or Obama era over the next four years, whatever Biden does. Assets are priced for perfection and it requires positive surprises to keep the momentum going.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Biden Victory, Divided Government

The odds for a Trump second term have narrowed as Joe Biden won Wisconsin and Michigan overnight, two key swing states which puts him within six electoral votes of the Oval Office.

All the major US stock markets closed firmly in positive territory with the tech-heavy Nasdaq leading the way, after gaining as much as 3.5% and futures continuing to point up. Asian markets are similarly upbeat with the Nikkei climbing 1.3% and taking the benchmark above 24,000 for the first time since January.

Investors have returned to the top performing parts of the market – namely the Tech megacaps – as the prospect of lower stimulus spending and US growth draws ever closer. Results out of Nevada later today could prove the tipping point for the election result, with the state due to report by noon time in New York.

As we said yesterday, the reflation trade – a big Democratic win driving a bumper stimulus package to fuel growth, and potentially inflation – is being unwound with bond selling driving yields aggressively lower.

The US 10-year yield has dropped over 20 basis points over the last 24 hours, a huge move, as markets look towards a Biden victory but divided Congress. There will be no tax hikes, no infrastructure spending and no green energy spending as the Democrat’s domestic policy becomes a lame duck.

Dollar sinking, FOMC tonight

King Dollar sits at the bottom of the major currency pile this week with traders re-pricing a Biden presidency and pushing EUR/USD to 1.1740. Markets will focus on the Fed meeting later today and its assessment on the economy, given the new corona wave and for any guidance on future action, especially with regard to bond buying.

EUR/USD whipsawed around yesterday but any dollar gains were soon blocked, and the pair returned within its established range. The 1.1612 level proved to be strong support and the 50-day Moving Average looms above around 1.1775 as first resistance, coinciding with yesterday’s high.

Bank of England boosts GBP

Lest we forget, it’s Super Thursday and this morning’s BoE surprised some in the market by launching more stimulus than expected, in an effort to boost consumer spending. The MPC voted to buy another £150 billion of government bonds pushing the total to £895 billion, while it left rates unchanged at 0.1% and said it did not consider voting to impose negative rates. The Bank forecast a double-dip recession for the UK following the second lockdown being imposed today.

There are still ‘serious gaps’ between the two sides in Brexit talks according to the EU’s Barnier, as a lack of progress pushed EUR/GBP earlier in the session back into the recent range. The 50-day Moving Average has capped gains above 0.9068, with today’s central bank action pushing prices back to the lower part of that range. Brexit talks are set to resume next week as the mid-November ‘final’ deadline approaches – watch for the headlines!

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Buckle up for a Wild Market Ride

Multiple factors deterred investors from taking risk including renewed lockdowns across several nations in Europe, growing fears of a double-dip recession and most importantly, the chances of contested US presidential elections.

The world may stay awake Tuesday night and Wednesday morning to discover who will lead the US for the next four years. However, the increase in mail-in ballots and the time it takes to count them may delay the announcement for several days and possibly weeks if early counted votes are indecisive. That’s why investors need to be prepared for a wild ride in market volatility.

With Democratic challenger Joe Biden eight to ten points ahead nationally and continuing to lead narrowly in key swing states, the former vice-president appears to be in a stronger position heading into tomorrow’s Election Day. However, memories of the 2016 presidential election remain fresh in investors’ minds when Trump battled against the odds and won the presidency despite losing the popular vote.

While a Biden victory is now considered a more bullish scenario for US and global equity markets with massive fiscal stimulus and less disruptive trade relations accompanying his presidency, the challenger’s policies may hit a roadblock if Democrats cannot take hold of both houses of Congress.

However, a ’blue wave’ can initially take markets to new heights. Our base-case scenario for a blue sweep is value stocks outperforming growth, emerging markets outpacing developed ones and a weaker dollar due to the massive fiscal deficit and debt issuance. The performance of the big tech names is likely to be very interesting under that scenario as higher taxes and more regulation should act as a drag, but on the other side of the equation, we still have a virus showing no signs of slowing down and hence tech companies will continue to benefit.

A Biden win and a Senate under Republican control is likely to be the worst outcome for investors, at least in the short run. Expect to see a further steep correction in US equities with a possible 10 to 15% drop. That would be mainly due to delays in passing new bold stimulus plans. However, that also largely depends on the virus trajectory. If a vaccine becomes available by year-end or early 2021, the US economy can continue to recover but at a slower pace than if supported by fiscal measures.

The least anticipated outcome is a Trump win and Republicans continue to hold the Senate. That could be the second-best case scenario, in which US equities continue to rise but the strategies would differ, in that growth continues to outperform value and the beaten-down energy sector likely recovers while alternative energy takes a back seat for a while. Oil prices would be volatile in the weeks ahead.

Whatever the outcome of the election, let’s hope the results will be known on the night itself or Wednesday. Otherwise, volatility will remain elevated with voting closer than the polls predicted and the increased potential for a refusal of the results, which would mean several weeks or months of intense uncertainty.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Virus Is Out of Control, So Are the Markets

The S&P 500 plunged 3.5% in its biggest drop since June, with all sectors falling more than 2%. Technology stocks were hit the hardest falling 4.38%, followed by Energy and Industrials which declined 4.18% and 3.47% respectively. Those seeking to protect their portfolios through put options are now finding it much more expensive, with the VIX index closing above 40 for the first time since 11 June.

While US election uncertainty remains a considerable factor impacting risk assets, the selloff this time was driven by fears the pandemic is entering a new phase. The US, Italy, Spain and many other nations are seeing new daily records of Covid-19 infections and hospitals are filling up at a very fast pace. Over the past several days it has become evident that the virus is becoming out of control and the only way to fight back is through new lockdowns. France have already announced a second national lockdown until at least the end of November and Germany will impose an emergency lockdown which includes the closure of restaurants, gyms and theatres. As a result, the German Dax and French CAC fell 4.17% and 3.37% respectively.

US futures indices are currently indicating a rebound of more than 1% after yesterday’s sharp selloff, but that can be put down to bargain buying rather than a shift in fundamentals. Expect volatility to remain elevated for the next several days.

With another stimulus package dead and buried for the time being, US consumers who are the biggest driver of the economy will have more reasons not to spend, especially if new State lockdowns emerge leading to more job firing. Today’s Q3 GDP report is expected to show a 31% increase in real growth but given that analyst estimates range from 8% to 37.1%, there is room for surprise. Although this data is a lagging indicator, it can still lead to big market moves if it deviates largely from expectations. It will require a significant positive surprise to encourage investors to buy the dips, especially given that Q4 doesn’t look promising with the latest developments.

With the chances of a double dip on the rise, the European Central Bank is under more pressure to act given that several countries are undergoing new lockdowns and there still doesn’t seem to be any cohesive fiscal response to the pandemic. We are expecting the central bank to hold fire for now and set expectations for December easing, but given the fast pace of deterioration in the region we cannot rule out the announcement of new easing measures. The Euro remains under significant pressure whatever the outcome from the ECB meeting today. However, if a new easing package is announced, we are likely to see EURUSD drop towards the 1.15 – 1.16 range.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Investors Bracing for Busy Week Ahead

Fiscal stimulus had been the dominant topic over the past few days and the chances of passing any kind of package ahead of next week is declining, while coronavirus infections hit records in the US and several European countries.

US political drama will continue to be the major market moving factor for the upcoming week and probably beyond. So far betting odds continue to show Biden in the lead with a 66% chance of winning the election, according to RealClearPolitics. However, chances of a blue wave have dropped to 50% suggesting a more volatile market reaction to the result on 3 November. Markets still seem positioned for a Democratic sweep, given how infrastructure and renewable energy stocks have surged over the past four months relative to sectors dependent on a Republican win such as energy, financial and defense stocks.

Currency traders also share a similar belief, with the Dollar lower against most major peers year-to-date, and expecting the inverse correlation between the Greenback and risk assets to continue to hold over the foreseeable future.

Investors should be prepared for more noise across asset classes as we approach Election Day, especially if Trump manages to tighten the race with a few days remaining.

Away from politics, it is a big week for earnings. Tech giants Apple, Amazon, Alphabet and Facebook are among the 186 companies due to announce third quarter results this week. If positive earnings surprises continue to hold at around 84%, that could provide a further boost to large cap stocks, but if virus infections hit new records this should cap the gains.

Monetary policy meetings are also on the radar of investors this week with the Bank of Canada Wednesday, and European Central Bank and Bank of Japan both announcing decisions on Thursday. Deflation has become a major threat in Europe and despite the ECB increasing the size of its Pandemic Emergency Asset Purchase Program (PEPP) to €1.35 trillion from €750 billion, economic activity in the Eurozone appears to stall, according to the latest service PMI’s. The absence of a cohesive fiscal response is making the job harder for the ECB, and while challenges continue to mount from rising Covid infections, a Brexit trade deal and the risk of a double dip recession, the central bank is expected to pave the way for more stimulus. However, this won’t likely come before December.

The Bank of Japan is also expected to keep policy unchanged on Thursday, but the downgrade in economic forecasts will be crucial for the Yen and Japan’s equities.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Stimulus Hopes Keep Stocks Afloat

The dollar was little changed against its major peers, gold traded slightly higher and crude oil fluctuated ahead of today’s OPEC+ Joint Ministerial Meeting.

China’s Q3 missed expectations

China’s GDP grew 4.9% in Q3 compared to last year, coming up short of market expectations for 5.2% growth. Despite the miss, China remains the only major economy to post growth for the first nine months of 2020. Other indicators are also pointing towards a broader recovery which could be reflected in GDP for the final quarter of the year, if sustained.

Fixed asset investments turned positive for the year, increasing 0.8% in the first nine months of 2020. Retail sales rose 3.3% year-on-year in September in a clear indication that consumers are confident enough to open their wallets again. Finally, also released today was the industrial output figure which was another bright spot, growing 6.9% in September, the fastest since December 2019. This should make China more appealing to investors as fundamentals are catching up with stock market performance, while most major economies still have a tough road ahead towards full recovery.

Stimulus Hope

Market participants are fed up with US politicians as the deadline for coronavirus relief continues to be pushed further out, with House Speaker Nancy Pelosi setting this Tuesday as the latest line in the sand. A stimulus package is certainly required at the moment with US infections topping 50,000 for a fifth straight day while millions of Americans need aid with rising economic stress. Given recent history, it’s hard to say whether a bill will be approved or not, however the earlier the bill is signed the better it is for households, the economy and equity markets. The slight rise in US Treasury yields and futures are signs of optimism that a deal could be reached before 3 November, but chances of disappointment remain high.

Prepare for a no Brexit deal

The pound moved sharply lower on Friday after British Prime Minister Boris Johnson announced that it’s time to prepare for no trade deal. GBPUSD declined almost 100 pips in a matter of less than a minute after Johnson’s announcement. However, the currency managed to pare the losses throughout the day and closed where it started. Many traders might have been shocked by the Pound’s reaction, especially those who are not used to Johnson’s Brexit statements. Currency markets are simply saying do not believe what he says, as it could be just another tactic he’s using to get some concessions from the EU.

A no Brexit deal means that the Bank of England would take interest rates into negative territory and 10-year yields would drop below zero (they are currently 18 basis points above zero). That’s clearly not priced into Sterling. Markets still believe the base case scenario is a last-minute deal which could send GBPUSD towards 1.35. However, if they are wrong, get ready for a 1,000pip drop.


Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

UK-EU Play Chicken as Brexit Deadline Looms

The UK has been trying since March to seal a post-Brexit trade deal with the EU, with little progress to show for it. Over the weekend, PM Johnson reached out to German Chancellor Angela Merkel, and French President Emmanuel Macron, to try and break the deadlock, just days before EU leaders are due to gather for a two-day summit beginning October 15th, where Brexit would surely rank high on the agenda. French government officials are already pushing back, saying they are willing to take a hard Brexit over a bad deal.

When PM Johnson announced his latest deadline back on September 7th, the Pound went on to weaken by some four percent against the Euro, before paring its losses. EURGBP is now testing its 50-day simple moving average (MA) as a key support level.

GBPUSD on the other hand its testing its 50-day MA as a key resistance level, having weakened by as much as 4.5 percent since the looming deadline was unveiled, only for the currency pair to climb some 2.9 percent since its September-bottom.

Although markets are pricing in an uptick in volatility in both EURGBP and GBPUSD over the week, the price swings are expected to be relatively tame compared to extremes over recent years, judging by the 1-week implied volatility for both currency pairs. The keen and seasoned observer would note that delayed deadlines have become somewhat of a norm amid the Brexit saga, and previous displays of brinkmanship have yet to see either side walk away from talks, despite multiple threats of doing so.

Still, that isn’t a line that Sterling can necessarily afford to cross.

Should the UK indeed leave the EU without a trade deal in place by December 31, the repercussions on the Pound would be seismic, potentially sending EURGBP much closer to parity! Still, the FXTM Trader’s Sentiments are overwhelmingly short for EURGBP.

As for GBPUSD, with traders having grown accustomed to Brexit-related blusters, perhaps the November 3 US Presidential elections would have more of an impact on cable. The FXTM Trader’s Sentiments are currently net long on cable.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Stimulus or no stimulus?

This isn’t surprising given the news developments over the past few days, from President Trump’s Covid diagnosis to him returning to the Oval office, and then his tweet announcing an end to stimulus talks followed the next day by new tweets urging Congress to pass a targeted piecemeal package.

That is a lot for investors and traders to digest with less than four weeks to election day, and even before that we have the earnings season which is kicking off next week.

Despite all the noise, it is becoming more evident that fiscal stimulus remains the top priority for markets. Few doubt that a new package is coming but the timing is the most critical aspect. The longer it takes, the more businesses will shut down and more jobs be laid off. At the moment, investors remain overly optimistic that the House will approve a targeted stimulus package, but there is a high chance of disappointment given past experience. Expect volatility to remain elevated until November 3 and maybe well beyond if Biden wins the election and Trump refuses to concede, which is another underestimated risk.

The FOMC minutes released on Wednesday acknowledged that interest rates will remain near zero for years to come, but the US bond market reacted with disappointment pushing 10-year yields towards 0.8%. That’s simply because the Fed failed to offer new specific details that investors were craving for, especially on metrics that will determine the next rate move. There also wasn’t more guidance on the asset purchase program, which markets were hoping the Fed will increase given the current state of the economy. Overall, the minutes seemed tilted to the hawkish side given the information we already know. This should explain why the Dollar selloff was limited despite the sharp rally in equities.

In commodity markets, Oil edged slightly higher as Hurricane Delta is set to make landfall on the Gulf Coast by Friday. More than 180 offshore facilities have been evacuated which is likely to halt 1.5 million barrels of output. However, it’s the demand side of the equation that is likely to have more weight over the medium-term and that’s likely to keep any gains in check.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Rising Covid-19 Cases Keep Risk Assets Under Pressure

Investors are becoming increasingly worried about the momentum in the economic recovery given the resurgent numbers of global Covid-19 cases and lack of progress on a new US stimulus package.

Although President Trump signaled his readiness to back a bigger stimulus bill last week, the Supreme Court’s empty seat left by the passing of Ruth Bader Ginsburg is likely to complicate the matter. The fight between the President and Congressional Democrats on whether to fill the vacant seat now or wait until after the election is expected to lead to more delays in reaching a middle ground on a new fiscal package. Hence, we would expect that the much-needed stimulus will be pushed back until after the US elections.

Given that the list of uncertainties is growing, especially on the pandemic front, risk is now skewed to the downside. We have US elections just around the corner, hefty valuations in growth sectors despite the recent correction and the high stakes of possible national lockdowns in the UK and elsewhere all pointing to waning momentum in the economic recovery. All these factors indicate more volatile times for the next several weeks.

Datawise, investors need to keep a close eye on September’s flash PMIs coming out of Germany, France and the UK this week for further indications on how the big European economies are faring following the strong rebound in early Q3. Signs of weakness here will be a strong signal that the economic recovery is indeed losing its way and further action is needed from fiscal and monetary policymakers.

Currency markets are not yet reflecting the risk aversion seen in equities. The Dollar is trading slightly lower against its major peers, with the DXY -0.15% at the time of writing. The Fed is clearly the winner among other central banks in providing the most accommodative monetary policy, which means the long-term projections for the Dollar remain to the downside. However, if the selloff in US equities accelerates this week, expect the greenback to regain some support.

In commodity markets, Brent fell by 1% after trading slightly higher in early Asian trade. The battle between the bulls and bears is keeping prices rangebound between $40 and $45. At this stage, the demand outlook is far more important than the supply side. That’s why oil traders need to keep a close eye on the trajectory of the virus, especially if it’s going to lead to renewed lockdowns. Gold is also another commodity stuck in a narrow range as traders await new clues on the Fed’s policy approach towards inflation. This could happen later this week as Chairman Jerome Powell may provide new hints when he appears before the Congress on Tuesday.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Are Stocks Heading for a Further Correction?

There was no specific trigger to the selloff but after extreme bullishness driven by monetary and fiscal policies, stock prices reached levels that could no longer be justified by fundamentals.

There is no doubt that the investment environment has drastically changed compared to a few years ago. Given the new approach of the Federal Reserve towards ’average inflation targeting’, investors are not concerned about tightening monetary policy, at least for the next couple of years. Theoretically, this means businesses will enjoy cheap debt financing in order to expand, leading to higher potential future earnings.

It’s true that valuing a company at a lower required rate of return provides a higher intrinsic value for the stock price, but what we have seen over the past several weeks was more euphoric and about momentum buying rather than rational investment. Fears of missing out on the rally also led many investors to jump into the market without doing proper analysis. While we still cannot compare the current environment to that of 1999-2000, investors need to be concerned about the price they pay to acquire stocks.

The steep correction seen on Thursday and Friday is healthy and much needed after the five-month rally, but it requires a more extended pullback to encourage long term investors to build positions. We probably need another 10 – 15% drop to end this euphoria and this will only happen if investors put more focus on current fundamentals that have been ignored for several months. Let us not forget that we have not yet found a cure for the virus and corporate bankruptcies will be on the rise as we approach year-end. Liquidity and low interest rates alone cannot be the solution to everything, so it’s essential to see continued improvement in economic data and an end to the pandemic for sustainable upside in risk assets.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

US Stocks Continue to March Higher Despite Rising Implied Volatility

That was well above the market forecast of 54.5 and the highest reading since November 2018. The leading indicator was supported by new orders which increased to 67.6 last month, but the employment component of the index continued to show weakness suggesting that factories are still slow to bring back employees. If the ISM services index due to be released on Thursday shows a similar reading, that would suggest jobs remains a weak spot in the US economy. However, investor focus today will be on the ADP employment change data which is expected to show 950,000 jobs were added in the private sector in August versus 167,000 in July. The ISM surveys along with the ADP report may provide an early indication of what to expect from Friday’s non-farm payrolls report.

Improving economic data, along with expectations that interest rates will remain near zero for several years, are great ingredients for risk assets. Investors do not seem to be worried about overstretched valuations as long as the Fed is willing to depress interest rates and continue providing the liquidity needed to keep yields in check.

Despite this optimism, investors need to re-think how to approach a market that’s sitting at record highs with two months remaining to the US presidential elections. Latest polls have shown the race between President Donald Trump and former Vice President Joe Biden have narrowed significantly over the past few weeks. According to Real Clear Politics, the difference is now less than 1% point in favour of Biden. The narrowing gap has translated into a sharp rise in future contracts for the Vix volatility indices. At the time of writing, the October Vix contract is sitting above 33 while spot Vix is hovering near the top of August trading range at 26. A rising stock market with elevated volatility is not a healthy sign and usually indicates turmoil ahead. So, expect risk to be skewed to the downside with big moves as we head into October.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Investors Continue to Build on Best August in 36 Years

The S&P has gained 7.24% so far this month, the Dow Jones Industrial Average is up 8.42% and back to positive territory for the year; meanwhile, the Tech-heavy Nasdaq 100 continues to outperform with 10% gains.

The August run reflects an accommodative Federal Reserve, a weaker US dollar, better than anticipated economic data, moderating Covid-19 cases in the heavily US-hit Sun Belt region and positive news towards a vaccine. These factors continue to provide investors with the green light to go risk on.

Few may disagree that we have reached overbought levels on US stocks. RSI’s on the three major indices are all trading above 70 and any valuation metric you look at provides the same signal. However, there needs to be a catalyst for a correction and that’s why upcoming US data and events will be of great importance.

The monthly US jobs data, due to be released on Friday, will indicate whether employers continued to hire following the easing of lockdowns that began in May. Economists are anticipating that 1.55 million jobs were added in August, a slight drop from July’s 1.76 million, but still a healthy figure given we are in the middle of a pandemic. However, initial jobless claims which rose by more than 1 million over each of the past two weeks are slightly worrying, especially if the government does not act soon to introduce a second stimulus package that reaches most unemployed Americans.

Tensions between the US and China may rise again after TikTok app owner, ByteDance is now required to seek Chinese government approval to sell its US operations. Depending on how this situation evolves and how it impacts other Chinese companies in the tech industry, we may see more volatility in the days ahead.

In currency markets, the US dollar continued to hover near its two year lows against a basket of currencies. Bears are looking for a break below 92.12 in the Dollar Index, but given that short positions are at extremes we may see more consolidation before another downside move. Gold will continue to be one of the best beneficiaries of the dollar’s weakness so expect to see a retest above $2,000 in the upcoming weeks.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Investors Awaiting Fed’s Powell Speech Before Making Their Next Move

Inflation is the keyword and the policy framework to target it will determine whether we see more upside to risk assets in the months to come.

So far, we have only seen rising prices in asset classes such as stocks in particular, but throughout the past decade, the consumer price index has averaged around 1.5% so missing the Fed’s 2% inflation target. The FOMC’s dual mandate has been to maximise sustainable employment and keep prices stable and while they have been successful in the former (prior to the pandemic), they have failed miserably on consistently hitting their price target.

‘Average inflation targeting’ is the new formula expected to be endorsed by Powell today. It’s a policy framework that allows inflation to run above or below the 2% target, but given that inflation has been running below target for several years, the objective would be to allow price rises to overshoot for more extended periods before tightening policy.

However, the idea of allowing inflation to run above target for extended periods is hard to sell to politicians, so it will be interesting to see how Powell is likely to package the new policy framework.

The positive sentiment in US equities continued yesterday with the S&P 500 and Nasdaq hitting new record highs ahead of this week’s key risk event. It seems expectations may be too high as Powell will need to be overly dovish to meet these expectations. No one believes that he will disappoint the markets but given the scale of the latest rally in stocks, chances of a pullback are high before bulls resume their march higher.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Fed Minutes Put the Brakes on Stock Rally

After a brief celebration of a new intraday record high on the S&P 500 and a two trillion Dollar market cap for Apple on Wednesday, the music suddenly stopped and with it, the ‘rally of everything’. All major US indices began to stumble, the Dollar woke up from a 27-month low, Oil declined and gold lost 3.5% in value.

Asian and European stocks are following Wall Street lower today and US futures are also indicating further declines to the start of the trading session across the pond.

The change in mood has been clearly down to the release of the minutes from the FOMC’s July meeting which reminded investors that the economy is still not in good shape. The surge in Covid-19 infections over the summer has muted the recovery and anyone still believing in a V-shaped recovery needs to do some reassessment. However, this was not the only reason why investors turned defensive. The fact that the Fed appeared reluctant to step up further stimulus efforts imminently, disappointed the bulls who were expecting further clues on the trajectory of monetary policy.

While the Fed did not rule out the idea of yield curve control or targeting specific maturities on the yield curve, policymakers do not seem committed to following this path yet. The other disappointment came from a lack of commitment towards more forward guidance on the path of the federal funds rate. That was a significant change from the previous minutes which indicated the need to provide longer-term forward guidance and to only raise rates when specific economic thresholds are met. Despite the fact that the Fed has been clear that rates will remain low for a long period, market participants needed more assurance and they did not get this.

The failure of Wall Street to build on Tuesday’s record closing high may be worrying. The rally over the past five months has been mainly driven by Tech firms which have become a defensive sector in the Covid era, but there were hopes that the more economic sensitive sectors, commonly known as ’cyclical stocks’, would follow suit. Now with concerns over valuation in tech stocks growing bigger, improvements in economic data likely to cool down and the scale of fiscal stimulus still unknown, expect to see further profit-taking and a return to a more volatile market.

The problem that many investors will face today in a market downturn is the high correlation between asset classes. There is no place to hide and diversification is no longer effective in such connected markets. The only way to protect portfolios is through increasing cash allocations and buying expensive put options.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

S&P 500 Returns to New Highs at a Record Pace

2020 cannot be compared to any other year in terms of the brutal plunge in the S&P 500 and the speed of its recovery. During the 2008 Great Financial Crisis, it took 1,381 trading days for the S&P 500 to return to its 2007 record highs. Following the dotcom bubble in 2000, it took 1,841 trading days to hit a new record. This time around, only 121 trading days were needed for the index representing the 500 largest US publicly traded companies to complete a full turnaround from a peak to trough to a new peak again.

The S&P 500 was only 6 points shy from closing at a new record on Wednesday following a 54% rally since hitting a bottom on March 23. More than $10 trillion in market cap have been recovered in less than a 6-month time span. And despite more than 80% of reported earnings beating market estimates, profits in Q2 have dropped 33%, which marks the largest year-on-year decline since Q1 2009.

However, the biggest difference between this recovery and past bear-bull market cycles is its breadth. As of Wednesday, 282 constituents of the S&P 500 are trading lower for the year and 200 companies are below their 200-day Moving Average. The Tech sector now represents 35% of the index weight, with the biggest 5 Tech companies (Apple, Microsoft, Amazon, Alphabet, Facebook) representing almost a quarter of the S&P 500 market cap, with a total value of $6.9 trillion. These are the companies which have driven the index to retest its record highs. Meanwhile, sectors like the Financials, Industrials and Energy have been left behind and the gap between them and the Tech companies is getting ever wider.

This tells us that the world we live in today is different from the one we saw six months ago, and our lives will be dominated by Tech like never before as returning to normal ways of living remains far from reach. If that statement is true, then the price tag for these Tech firms is justified despite them looking extremely overstretched when looking at current valuation metrics. However, if the big Pharma firms succeed in delivering a vaccine in the next couple of months, we should see rotation from the Tech titans to more cyclical ones.

Going forward, expect volatility to increase as investors try to figure out whether to take profits or continue the wild momentum ride. But my concern is that without having a strong contribution from the cyclical sectors within the S&P 500, the current rally looks distinctly unhealthy.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Latest Surge in Risk Assets to Be Challenged by Data and US Congress

US futures are steady as investors have lots to digest including important jobs figures, renewed US-China tensions and a key ruling on the new stimulus package from Congress.

In currency markets, the Dollar could not maintain an early morning rally. After marching towards 93.70, the DXY returned to where it started at 93.45. Low interest rates remain the biggest challenge to attracting Dollar inflows, with current 10-year bond yields stuck near 0.5% and real yields sitting around -1% when deducting for inflation. Large twin deficits along with negative real rates is a depressing formula for any currency, even if it is assumed to be a safe haven one. However, given the bearish bet on the USD has risen again to the largest overall since April 2018, we may see some sort of short squeeze going forward leading to some spikes in the US currency.

With the earnings season coming closer to an end, the focus will shift back to data and the decision by Congress on the next Covid-19 stimulus package. Discussions between the Democrats and Republicans are making some progress especially as both are on same page with regards to the direct cash payment of $1,200 to Americans, but unemployment assistance remains a key sticking point and a middle ground doesn’t seem to have been reached yet. Democrats want to keep the federal assistance as the previous package of $600 per week, while the White House is calling for a third of this amount. The longer the disagreement persists, the higher the chances of a market correction.

While most agree that the bottom in economic activity is behind us, the question has now become whether the US recovery is showing signs of cracking and the Non-Farm Payrolls figure due to be released on Friday will probably answer this. After 7.5 million jobs were created over the months of May and June following 22 million job losses in the prior two months, markets expect another 1.65 million jobs to have been added in July. However, expectations vary greatly with some even expecting a contraction given two consecutive weeks of increases in initial jobless claims. The way forward is likely to be bumpy as several US states are re-imposing lockdown measures after spikes in Covid-19 cases. This probably won’t show up in the data until the release of the August figures in September. Investors should also keep their eyes on other US data releases out this week for further evidence on whether the economic recovery is stalling including manufacturing and services activity, motor vehicle sales, factory orders and the weekly initial jobless claims.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

After the Fed’s Reassurance, It’s Time for Fiscal Policymakers to Deliver

Market participants are growing more confident that interest rates will remain near zero for a long time to come, even if inflation starts to tick higher. That is one risk-supporting factor investors do not need to worry about in the medium-term. However, the line added to the Fed’s press release stating that ’the path of the economy will depend significantly on the course of the virus’ should be taken into consideration as to how much risk needs to be in portfolios.

While some of the worst affected US states have shown that Covid-19 infections have peaked, the virus is not taking a break. Deaths in the US exceeded 150,000 on Wednesday and with a vaccine not expected to hit the market until later this year or 2021, more measures need to be taken to control the pandemic which suggest more economic pain. That is especially the case when we look outside of the US with Brazil reporting a daily record of 69,000 new cases on Wednesday and new outbreaks seen in Asia, Spain and Australia.

Now the pressure has turned to the fiscal side and chances for disappointment are high as Democrats and Republicans are nowhere close to a deal. Both parties are struggling to find common ground and with millions of jobless Americans facing the expiration of their $600 a week unemployment benefit, any further delay could lead to serious economic shocks. We still believe that both parties will eventually come to an agreement, but the more compromised the agreement is the more pressure it will put on market sentiment.

Asian equities traded mostly higher this morning and European equities are expected to show slight gains. However, with US futures turning negative after yesterday’s strong performance, these may not hold. There are a lot of earnings releases from Europe and the US today, but the most watched results will be from the four Big Tech names Amazon, Apple, Alphabet and Facebook who report after the market closes. Those companies, including Microsoft, have been the major force driving US equity indices higher, so expect to see a lot of volatility in the next 24 hours.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Gold Hits New Record as Dollar Continues to Struggle

Following six days of steep gains, Gold has finally broken the 2011 record high of $1,921, reaching $1,943. Meanwhile, the Dollar seems to have lost the title “King,” at least for now, as it continues to be dragged lower despite all the negative news which used to attract inflows from global investors.

Against major currencies, the USD is trading at a 4-month low against the Yen, 15-month low against the Australian Dollar, 22-month low against the Euro and 5-year low against the Swiss Franc. That is clearly broad weakness in the Dollar and not driven by risk-on/off behaviour. Plunging risk appetite is no longer translated into a strong Dollar, otherwise the tit-for-tat closures of the Chinese and US consulates which sent global equities lower last week should have driven inflows into the Greenback. This didn’t happen.

I am still afraid to call the Dollar’s decline a structural change in the currency’s outlook. The US Dollar still represents more than 60% of global currency reserves, so it’s only when this figure begins to decline that we might possibly call the Dollar’s weakness a structural change. However, several factors are driving the Greenback lower, with real yields being the dominant factor as the Fed is likely to continue holding interest rates lower for a prolonged period of time. For this same reason, Gold is today trading at a new record.

Negative real yields and trillions of Dollars in monetary and fiscal stimulus are threatening to create bubbles in several asset classes, and I believe many tech stocks are already in this territory. The question several investors may be asking now – is Gold also in a bubble?

In terms of real price, bullion is still under the 2011 peak when inflation is accounted for, and well below its peak in 1980 when the price reached $835 per ounce. On both occasions, the price tumbled over the following months and years. Back in the 1980s, inflation was skyrocketing and US 10-year yields were trading at 13% in early 1980 and peaked at around 16% in 1981. There was a strong belief that inflation would remain at double digits which caused the buying spree in Gold, but over time this fear diminished and then the longest bull market in treasury bonds occurred until today. In 2011, it was a similar situation as central banks across the globe, led by the Federal Reserve, began lowering rates and pumping liquidity into financial markets during the Global Financial Crisis. However, several years later, the risks of deflation were still greater than inflation. Here we are again in a similar scenario, but the measures taken today have far exceeded the ones in 2009 in terms of fiscal or monetary stimulus.

With inflation expectations returning to pre-Covid-19 levels, the issue becomes how long the Fed can afford to keep inflation running above target to support their employment mandate. The longer they keep rates low and the higher inflation expectations go, the more likely we are to see Gold benefiting, and I do not think this relationship will break any time soon. Looking at open interest in the futures markets, there does not seem to be excessive speculative positioning. This suggests physical buying and exchange traded funds are currently the key factors driving the price, which means a break above $2,000 will likely lead to increased speculative positioning that could push prices even higher.

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Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.