Heading into the home straight

The final week of campaigning in the US elections and the never-ending saga of a US stimulus package are likely to dominate financial markets this week, to the exclusion of all else. Joe Biden’s lead has shrunk slightly in national polls but is holding steady in many of the swing states that will deliver victory to either candidate. One factor that may yet play out is that 56 million American’s have already voted, meaning that changes in the polls this week may not be as talismanic as in elections past.

The real US election, that for the US Senate, remains too close to call, with at least nine states up in the air. For the Wolves of Wall Street, a Biden presidency and a Republican Senate would arguably be the best of both worlds. Simultaneously repairing America’s international relations while reigning in the worst of alleged Democrat profligacy. In the short-term, it is likely to cause some speedbumps in the buy everything trade.

Deadlock continues in US stimulus talks

The US stimulus talks continue to drag on with both sides accusing the other of moving the goalposts. Markets have taken the rapidly fading pre-election package hopes in their stride, assuming that something will come soon after the election. With the new Senate not starting work until early January, and the new president until mid-January, that maybe ambitiously optimistic. The lame-duck period between new administrations could be anything but this time around.

Financial markets continue to price in a “blue-wave’ victory and a US stimulus deal. Given the possible permutations over the US elections, let alone stimulus negotiations, a lot must go right for that to happen. History teaches us that life is not so linear and predictable. Therefore, I continue to believe that reality will strike home this week, and a reduction in risk positioning will characterise it. That should see the US dollar outperform along with other haven currencies. Equities should ease, and gold should rally. That said, gold’s technical picture is ominous this morning, so perhaps it is me being too linear.

Elsewhere in the world, China’s leadership group begins today until Thursday, its annual plenum to plan its next set of 5-year plans. Given the past four years of the US administration, China is already a winner, with Washington DC unable to come up with a 5-day plan, let alone a 5-year one these past four years. Much speculation will abound as to what China’s plans will be. My tuppence-worth will be micro-processor self-sufficiency, further internationalisation of the yuan, a pivot to renewables and a lower annual GDP target.

US GDP should show a 30%+ rebound in the mid-week for Q3. That will be a peace dividend rebound from the shuttering of the US economy in Q2. Sans any fiscal stimulus that every Federal Reserve Governor has been screaming for, consistent gains going forward will be harder to maintain.

The White House appears to have unveiled its Covid-19 strategy this morning, with cases hitting record highs across the country. The White House Chief of Staff told CNN that the US was not going to control the pandemic and they were looking at vaccines and therapeutics instead. Saying this in an election week may not be intelligent campaigning, but the US is certainly not alone in putting everything on black 13 for a vaccine by year’s end. Mitigation, while hoping for the best on the vaccine front, or as I call it, growth over graves, is an increasingly common strategy. In the meantime, try not to be old or weak.

Europe continues to be a concern, with Covid-19 cases rocketing and Italy and Spain enacting sterner national restrictions. The UK’s restrictions meanwhile have seen regional leaders in open warfare with the central government. The ECB will be watching the potential “double-dip” with concern, and it may force its hand into more quantitative easing. Thursday’s rate decision will be unchanged (rates are negative anyway), but the odds of more QE have probably risen above 50%. That should cap Euro’s gains this week with any new QE likely to move it to the lower end of its monthly range.

The day’s data calendar is bereft in Asia, with the highlights of the session likely to be German IFO this afternoon, followed by US New Home Sales this evening. With Hong Kong away today, activity will remain light in Asia as financial markets continue to be wary of headline-induced spikes in volatility from Washington DC.

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