1) US Politics
As far as global risk appetite is concerned, developments in the US political sphere continue to be THE dominant force. Two key uncertainties in particular stand out;
The first is the election and its outcome – Given the latest polling that puts Democratic Nominee Biden 12% ahead on a national level, as well as numerous other polls that give the the Democratic hopeful a commanding lead in a number of key swing states, market expectations and pricing are currently for a “blue sweep” (i.e. Democrats win the White House and win back the Senate, whilst holding the House). This outcome is seen as the most stock market favourable/USD negative, given 1) a Democrat controlled White House and Congress will spend BIG to boost the economy, which ought to outweigh the negative impact of tax hikes for corporates and 2) will be “nicer” in terms of global trade, handing a helping hand to global growth (a USD negative).
If Trump wins, or the outcome is close enough for Trump to contest the outcome and force things through the Supreme Court for a final decision on who won, this will be USD positive and stock market negative.
The second key uncertainty is the timing and size of fiscal stimulus package – Markets very much want fiscal stimulus given that the US economy is currently losing momentum and currently have the feeling that they will get what they want sooner or later; i.e. either the Trump Admin will be able to make a deal with the Democrats prior to the election, or a Democrat controlled White House and Congress will be able to get something even bigger through early next year.
The biggest threat to markets current expectations that BIG stimulus is on the way are some of the more fiscally austere Republicans. If the Trump stays in the White House, perhaps the next fiscal package will be much smaller/watered down. Either way, something should be on the way sooner or later.
2) Brexit: crunch time approaches?
Much is being made of the importance of this week for the Brexit saga. UK PM Johnson has said that the UK is prepared to walk away from talks if a deal is not insight by the 15th of October (Thursday). EU sources say the EU has no intentions of respecting the UK’s arbitrary deadline and have seen no indications from the UK that they are actually preparing to walk away from talks. Thus, the EU are expecting talks to continue and are planning on using the EU Leaders Summit, which begins on Thursday the 15th, to “take stock” of recent Brexit developments.
Market expectations that the UK will actually walk away from talks are pretty low, as indicated by the low one-week implied volatility indicated by GBP options markets. Therefore, if the UK did surprise us by walking away, we could see some big surprise moves in GBP (i.e. GBP downside).
More likely, the UK will find a way to explain that a deal is “in sight” and will continue with talks.
Then the question will be, can the UK and EU come to a compromise on the main outstanding issues of fisheries and state aid that are currently blocking a deal being signed. Any indication that these compromises are being reached will be bullish for GBP, whether that comes this week or later on in the month.
3) US data
The current market narrative regarding the state of the US economy is that is still recovering from April lows, but the rate at which jobs are being added and economic activity more generally is recovering is slowing significantly given the lapse of the majority of recent US government fiscal support measures back in July.
On Wednesday, we get September CPI numbers, expected to signal that inflation is still well below where the Fed wants it to be (they want it sustainably above 2%). On Thursday, we get Weekly Jobless Claims, which will likely indicate that the US labour market has continued to stagnate in early October. At the same time, we get, NY Empire State and Philly Fed Manufacturing Indices for October – these are the timeliest two US business sentiment surveys, and are thus widely followed by markets as an early read on how economic activity is looking in October.
On Friday, we have US retail sales; retail sales recovered back to record high levels VERY quickly in wake of the initial negative shock that came with lockdowns, in part boosted by government fiscal stimulus (i.e. the stimulus checks that were sent out). Moreover, many of the highest earners, who actually account for a majority of US retail spending, have not had their spending power hurt by the Covid-19 recession (unlike those at the bottom of the socio-economic ladder) and will likely keep lofty levels of spending supported.
We also get preliminary Michigan Consumer Sentiment data for October, which is the earliest read we on the health of the consumer this month, more than two months on from the expiry of enhanced fiscal support from the government.
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