Buy the rumour, sell the fact

Wall Street lower on profit taking

Wall Street eased overnight as investors booked recent profits in Apple Inc., after the launch of its new range of iPhones. It was really a case of buying the rumour and selling the fact in the short-term. It doesn’t alter the longer-term trend of Big Tech being the apple of the eye of the FOMO buy everything herd.

If profit-taking was the theme of the day in technology, Johnson & Johnson delivered a reality check to markets, after temporarily halting clinical trials of its Covid-19 vaccine. The emphasis is on temporary, though, and trials will more than likely resume quickly. It does, however, highlight the realities of vaccine development, even in an accelerated Covid-19 environment. Again, the pessimism will most likely be short-lived and has as much to do with extended short-term positioning, then a sea change in the race to develop a Covid-19 vaccine.

One knock-on effect was to drown out spectacular results for Q3 from JP Morgan, with Citibank NA also producing results that were not as bad as expected. Q3 earnings season now moves to fellow banking heavyweights Goldman Sachs, Bank of America, and Wells Fargo today. The trend should be not as bad as initially expected, but with the world and its dog long to the gunnels on equities, underwhelming results are likely to be harshly punished.

The Monetary Authority of Singapore (MAS) and the Bank of Korea both left monetary policy unchanged this morning. That follows the Bank of Indonesia standing fast yesterday. It mirrors a trend by the region’s central banks to keep their powder dry as the region coat tails China’s recovery. The preference to keep their powder dry is a wise one, with the rally in Asian currencies giving the region’s central banks room to move if necessary. The clear preference, in contrast to the US notably, is for fiscal policy to do the heavy lifting with the world’s central banks edging closer to running on empty.

Apart from Japan’s Industrial Production data later today, the day is quiet in Asia. The morning’s highlight is likely to be a keynote speech by China’s President Xi Jinping in the coastal city of Shenzhen. President Xi could spring a few reform surprises in his address, and that could lift equity markets in China, and the region later today.

It’s a strange year when you can freely mention Brexit without your audience groaning and falling to the floor but mention it we shall. Trade talks between the UK and Europe another impasse overnight, coming just one day before the UK’s self-imposed walk-away deadline tomorrow. The sterling continues to remain firm, surprising the author. Although sense may prevail, and the EU may cobble together a deal before the EU leaders meeting at the end of the month, not enough risk is priced into the British pound at these lofty heights. In fact, none is. Against a background of the Covid-19 second wave washing over the UK and Europe, with new restrictions announced seemingly every day, a failure to read a trade deal would be a huge black mark for both the euro and sterling. As critical recipients of the global recovery FOMO-trade, the fall from grace could be harsh indeed. Those with long positions in both should tread very carefully over the next two weeks.

US monthly inflation underperformed overnight, with tonight’s PPI likely to confirm that trend. While concerning for the Federal Reserve, it will not be enough to sound alarm bells, significantly ahead of an election. Tomorrow’s Initial and Continuing Jobless Claims will assume greater importance though. Improvements have stalled in recent weeks, and poor data tomorrow night will send shivers through positioning attached to the global recovery story. Unfortunately, it is unlikely to jolt America’s politicians from their fiscal stimulus stand-off, with the impending election subsuming reality on the ground. On that final note, markets themselves entirely focused on just that event as well. They will continue to be vulnerable to presidential tweet risk and other headlines emanating from the election campaigns.

Overall, the price action in equity and currency markets overnight looks like a stalling in the momentum of the “blue wave” and fiscal stimulus trade. That is likely to be a temporary setback this week and early next. However, as the US election gets closer, a harsh reassessment of those risks may be warranted. It would not surprise me at all to see the US dollar rally impressively in the week leading up to November 3rd, especially if the polls narrow for the presidential and most especially, the senate race.

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