Sell, Mortimer! Sell!

Europe equity markets slide on German, French lockdowns

The blue wave trade became Moody Blue overnight, as buy everything turned into sell everything. Although Asian markets wobbled yesterday, it was Europe that led the rout as France and Germany enacted national lockdowns lite in an attempt to control their exploding Covid-19 cases. European equities headed south and Wall Street was all too happy to join in with Covid-19 cases ramping up in the US and any hope of a US stimulus package in November (it was previously pre-election), left blowing in the wind. The belated realisation that the US Senate race is the real election race next week is likely to dampen any comeback enthusiasm, with nine states too close to call and the Supreme Court waiting to adjudicate results.

France and Germany’s national lockdowns are quite a bit different this time. The emphasis is on preventing citizens from meeting in large groups and socialising, while attempting to keep schools and businesses’ open. That is somewhat ironic, as the lack of social discipline and allowing Europe to enjoy summer holidays and partying has played no small in getting them back into this mess. The compromise solution hints of desperation at preventing the dreaded double-dip recession (the Spanish flu pandemic featured three total lockdowns, I believe). I wish them well in its success, but I will not be at all surprised if it does not. With much of the rest of Europe and the UK heading in the same direction, I expect the euro, sterling and eurozone equities to be unloved for the next month at least.

The US dollar was the big winner overnight, as dollar-bloc currencies were bashed. The Australian, Canadian and New Zealand dollars coming in for particular attention. Oil gushed lower as equity markets fell over, and gold and silver could not escape their high correlation to large equity sell-offs.

Fellow haven currency, the Japanese yen, also continued rallying overnight ahead of the Bank of Japan’s meeting today. Retail sales today disappointed, falling 8.70% YoY for September and shrinking by 0.10% MoM, highlighting the asthmatic recovery of Japan’s domestic economy. There is an outside chance that the BoJ will increase quantitative easing in response to a soggy domestic economy. However, after years of much of the same and still no inflation in sight, the most likely outcome will be unchanged but watching closely. It is a metaphor for the past 30 years and a salutary lesson of why central banks are more scared of deflation than inflation. Like the virus, it’s hard to get out once it settles into the population. The yen should benefit, and assuming the world is still screaming “sell, Mortimer” for the rest of the week, which I expect, USD/JPY should test 104.00 and extend to 103.00 into the US election.

Asia, as is its wont of late, has been relatively stable this morning. Asian currencies held their own overnight, and equity markets, for the most part, have only edged modestly lower today. US equity index futures have rallied by around 1.0% today, likely driven by profit-taking from overnight shorts. That has supported regional markets which continue to benefit from the anchor provided by China, both on the economic data and currency front. Reuters is reporting that Joe Biden will “consult allies” on future China tariffs if elected. That story seems to be supporting Asian markets, with China actually moving into positive territory.

The price action in Shanghai suggests that all of Biden’s allies will tell him to get rid of Chinese tariffs. The keyword is “consult,” which doesn’t mean it will follow a path of action. And we still may have a Republican Senate and or contested election results at that level to contend with. Still, the story does appear to have put a floor under negative sentiment in Asia for now.

Later today, we have the ECB meeting, US GDP, and Facebook, Alphabet, Apple, Amazon and Twitter reporting quarterly results. The ECB is 50/50 I believe in increasing bond purchases, preferring to wait until December and better visibility on the fallout from Europe’s lockdowns, as well as Brexit. The December meeting will definitely be a “live” one though.

US GDP will rebound by over 30% for Q3, unwinding all the losses of the lockdown wracked Q2. Unless it surprises at 35%-plus, I doubt it will be enough to move the sentiment needle materially. Further gains from here will be much harder to grasp. The same is true for the FAAATs, where I expect all except Twitter to produce sparkling results. Timing is everything, and risk sentiment will speak louder than profits this week.

The famous catchphrase from the movie Trading Places will I believe, continue to dominate trading into the US election next week. Mortimer will keep selling like its 1983 (when regulators wore brown suits, did lunch, but not much else. Simple times). Election uncertainty and Covid-19 is belatedly being priced into markets and is a toxic mix. Any stimulus or political headlines are likely only to provide rallies to sell into.

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