EU Close – Markets focus on Trump-Biden Debate and NFP, China’s 5-year plan, Brexit Optimism, Commodities bounce back on weaker dollar

US stocks are off to a positive start as investors look beyond rising virus cases in the US and focus on the economic comeback that seems firmly priced in for next year.  The S&P 500 and 30-stock Dow are attracting some value investors following their four-week losing streaks, while the Nasdaq continues to benefit from FOMO trade with the tech giants. 

Tomorrow’s presidential debate will likely focus on the coronavirus, infrastructure plans, race and violence, transfer of power, and differences in tax strategies, with some focus on the NY Times story that paints the President as a serial tax avoider that has $300 million in loans due within four years.  Unless Biden has a big gaffe, many are not anticipating a big shift in the polls. Biden still has a strong handle in the battleground states but the Senate remains the big question mark. 

Global equities got a boost after China after both the PBOC reiterated their policy stance and the Politburo signaled their commitment to deepening reforms and further opening up of their economy in the next five years.  This really isn’t a de-escalation with tensions between for the world’s largest two economies, but it serves as a reminder that China continues to lead the recovery going forward. 

Once we get past the debate, Wall Street will remain focused on the last employment report before voters head for the polls.  A dismal NFP report could be enough to force Congress to act before the election.  

FX

Another key Brexit deadline is upon us and optimism is creeping back that lawmakers will have breakthrough by mid-October.  UK Cabinet Office Minister Michael Gove reiterated the UK won’t cut key clauses from the internal market bill but said today’s talks were ‘constructive’.  The British pound is ignoring the COVID restrictions and focusing on limited Brexit optimism, that is accompanied with a broader risk-on trading day that is sinking the dollar across the board. 

Oil

Oil prices initially benefited from a broadly weaker dollar but a deteriorating crude demand outlook due to virus surges in both Europe and the Americas is capping any rallies. 

Industry consolidation will continue to support oil prices.  Today, Devon Energy Corp’s announced the acquisition of WPX Energy, creating one of the biggest independent US shale producers.  With oil prices remaining stubbornly low and the risks of a big shift to ‘green energy’ with a Biden presidency, the energy space is likely to further consolidate. 

WTI crude is trading all over the place, but will struggle for any significant gains until the virus impact on crude demand improves. 

Gold

Gold is bouncing back, albeit not as strongly as you would expect considering today’s weaker dollar.   While the rhetoric from Washington DC has improved for a deal on a coronavirus stimulus package before the election, investors are not counting on it.  Gold has a messy road ahead, but the fundamentals still strongly support higher prices.  All the major central banks next move will be to provide more accommodation and that should keep the stimulus trade in place for gold.

The two big risks for gold are a COVID vaccine and a close election that keeps markets on suspense as to when we will find out who won and if it will be a contested election.  The path higher will be messy, but gold should start attracting value investors now.  

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