Election Day Eve, ISM impresses, oil rebounds, gold higher on election risks and Fed action prospects, commodity currencies rally

Investors place their final pre-election bets as both President Trump and Democratic nominee make their final blitz at key battleground states.  The conviction behind the bets are small considering no one can say for sure how the next 48 hours will unfold.  Much of Wall Street is still preparing for a blue wave that explains the October outperformance with many of the beaten sectors and the struggle with big-tech.  It is easy to make the argument that one has to be bullish stocks regardless of the election outcome:  The Fed is keeping rates near zero and they will likely be one of the last central banks to raise rates.  The race for a COVID vaccine and treatments should have some winners in the next couple of months and that should provide optimism that the global economic recovery will only get better starting now.  Lastly, Congress will be forced to deliver stimulus as lockdowns and lack of state funding will force action.

US Manufacturing PMI surges

What stimulus!  The blockbuster ISM report could support the notion that the economy is doing much better than feared.  The headline manufacturing PMI surged to 59.3, the highest reading since September 2018, and a few points higher over the consensus estimate.  A robust report with strong acceleration with new orders, employment and inventories. 15 of the 18 manufacturing industries reported growth.  Regardless of the strong ISM report, the focus remains on COVID-19 and the likely regional restrictive measures that will hamper economic recovery over this current wave.

Oil

Crude prices are rising as the world’s two largest economies show manufacturing activity continues to expand, Europe’s restrictive measures should shortly deliver signs that the curve is bending, and after Russian energy minister Novak signaled he is having discussions regarding the potential delay of any tapering of the OPEC+ production cut agreement until the end of the first quarter.

The virus is the biggest bane with the crude demand outlook, but fresh lockdowns could be delivering some signs the curve will bend.  France, Germany and the UK have lockdowns in place that should help slow the virus spread in the next couple of weeks.

Crude demand is heavily counting on a couple breakthroughs with COVID-19 vaccines, so in order for the outlook to remain intact, governments just need to do whatever it takes to thwart the virus spread over the winter.

WTI crude should hang around the mid-$30s until we get beyond the election outcome, but if coronavirus cases and hospitalizations continue to trend higher, a test of the $30 level seems inevitable.

Gold

Gold prices are rising ahead of Election Day and all the turmoil that comes with it and before a Fed policy meeting that will likely signal, they are about to do more, and that Congress still needs to deliver fiscal support.  Safe-haven flows continue to pour in on contested election concerns, delays in knowing the Senate race outcomes, and fears of post-election unrest. Regarding the Fed, we might hear that they are closer to adopting yield curve control and increasing their purchases this week.

Once you get behind all the Election noise, it is hard to not like gold.  An astonishing number of votes are in and that bodes well for a Democratic sweep that would signal massive stimulus spending in the first half of next year.  Even if we don’t see a ‘blue wave’, the Fed is not moving rates for a few years, Congress will be forced to deliver more stimulus now that state and local governments will need more aid as the virus spread accelerates, and another four years of tough trade under Trump will support safe-haven flows into gold.

FX

Here come the commodity currencies! The global manufacturing recovery appears strong according to the latest PMI data from China and the US, send the loonie, kiwi, and Australian dollar higher against the US dollar.  The dollar will likely take a queue from the expected stimulus outcome following the election.  A blue wave will cement the belief that the dollar will become a funding currency under the first half of a Biden administration.  In the short-term, the euro remains vulnerable until they bend the curve.

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