An Action Packed Week Ahead

October 25, 2020 ā€¢ Estimated Reading Time: 13 minutes

Don't forget, although the clocks have changed in the UK/Europe this week, the U.S doesn't change until next weekend.

The U.S. will be 4 hours behind the UK & Europe until then.

Let's start in China, and their four day meeting to set a five year plan, (within the framework of the fifteen year plan).

Plans within plans.

The short version - China is now pretty much a 'middle-income' country and starting their transition towards a more consumption-based economy.

The economic growth rate will slow from previous levels, and this plan intends to guide the transition to a more developed, advanced economy, and avoid the middle income trap.  

There are plenty of parallels with Japan's exponential rise in the 80s (and we all know how that ended).

Here's a good primer via Reuters

Xi Jinping's right hand man also had his say;

Last week PBoC governor Yi Gang said that China are looking to ā€œimprove flexibility of the yuan, and let exchange rates play a better role as an automatic stabilizer in the macro economy and international balance of payments,ā€.

This is all part of their 'opening up' of the financial sector.

Worth keeping an eye on any developments. as headlines hit.  

Europe

The ECB decision should not surprise, as no further policy action is anticipated at this meeting.

However, the press conference and subsequent comments by ECB members will be more interesting.

At the last event, there were plenty of contradictions and even signs of strong disharmony among members, who were releasing their own comments to media whilst Lagarde was speaking.

Expectations are for the ECB to acknowledge the mounting downside risks to the staff projections and set the stage for further easing at the next meeting in December.

The main downside risk is obviously the rapidly increasing virus numbers and restrictions on economic activity that are coming into force already.

The latest news on that front;

Spanish Prime Minister Pedro Sanchezā€™s Cabinet Sunday approved a new state of emergency that will give the central government more powers and he announced the government planned a national curfew from 11 p.m. to 6 a.m., except in Canary Islands, where the infection rate is low.

ā€œWe must manage the pandemic without being overwhelmed,ā€ Conte said at a press conference in Rome on Sunday. ā€œIf we respect the rules this month, weā€™ll keep the curve under control and face December and the holiday season with more serenity.ā€

The plan is to try and maintain some control over the pandemic without reverting to the full national lockdowns.

Case numbers are definitely in exponential growth territory, and taking the headlines.  

Looking at that chart, you could wonder why there isn't an outright panic.

Much of this rise is due to increased testing.

Although further mobility restrictions have been introduced across Europe - markets haven't really reacted because this was broadly expected.

From the September ECB projections;

Thereafter, the baseline rests on the key assumption of a partial success in containing the virus, with some resurgence in infections over the coming quarters necessitating continued containment measures, albeit less so than in the initial wave, until a medical solution becomes available by mid-2021.

The data suggests that 'containing the virus' is not happening, but the continued containment measures are certainly less severe than earlier in the year.

So far, the data point that matters most offers hope that harsher restrictions can be avoided.  

It is hard to make direct comparisons to the first wave.

Case numbers are far higher (increased testing), but deaths have remained at relatively low levels.

Nonetheless, they are ticking higher.

The question is whteher they will rise to first wave levels or not (which may force governments into harsher restrictions).

This is an excellent read;

 šŸ¦  Goldman Sachs | Is the Virus Becoming Less Fatal?

(full note)

1/2 pic.twitter.com/nvoiAcPjggā€” PiQ (@PriapusIQ) October 25, 2020 

If deaths and hospitalisations don't follow the exponential path of the positive tests and economic activity remains at the expected lower levels, then there's no reason for alarm in the markets.

If deaths and hospitalisations start to increase exponentially, talk of national lockdowns must be expected, and markets may get a few jitters.

Whether this leads to a massive risk off event remains to be seen, but it will certainly have a negative effect in the short term.

If I had to call it, I think the increased testing will inevitably lead to more deaths being classified as Covid-related, and harsh restrictions (close to those in the first wave) will come into effect at some point over the winter.

This idea that we just need to get through the U.S. elections and Brexit negotiations before we arrive at the Eden of massive stimulus spending and effective vaccines just seems too easy, too optimistic.

Speaking of Brexit...

EU chief negotiator Michel Barnier is planning to extend his visit to London until Wednesday amid cautious optimism over the progress of post-Brexit trade talks with Britain, the Sunday Telegraph reported.

The European Union negotiating team had been due to return to Brussels on Sunday.

The paper said the British team would travel to Brussels on Thursday for more talks and that next Saturday had effectively become the deadline to decide whether the two sides could reach a deal.

Britain and the EU have made good progress in talks on a last-minute trade deal that would stave off a tumultuous finale to the five-year-old Brexit crisis, but fishing remains the biggest sticking point.

Hopes for an agreement rose last week when Reuters reported that France is preparing its fishing industry for a smaller catch after Brexit.

Progress.

According to Ivan Rogers (former UK ambassador to the EU), Boris will wait until after the U.S. election before deciding if no-deal Brexit is the way to go.

The full piece is here;

Rogers said: ā€œSeveral very senior sources in capitals have told me they believe Johnson will await clarity on the presidential election result before finally deciding whether to jump to ā€˜no dealā€™ with the EU, or to conclude that this is just too risky with Biden heading for the White House, and hence live with some highly suboptimal (for Johnson) skinny free-trade agreement.ā€

A little extreme, no?

Maybe certain concessions will become more or less likely (from either side) depending on the election result, but a no deal exit just because BoJo's hair buddy gets re-elected?

I highly doubt it.

Anyway, all pretty positive thus far.

We should expect more back and forth this week,with the occasional tantrum thrown in between.

The aim is to have a deal agreed before EU leaders meet on the 15th/16th November.

BOC Rate Decision

As you were with rates and QE. No changes expected.

The focus for this meeting is on the future and the central banks updated economic forecasts.

BOJ Rate Decision

'Decision'

Everything stays the same -0.1% cash rate, 10yr JGB yield target 0%.

BOJ are likely to downgrade their economic forecasts, but no new policy action is imminent.

This article was shared by the always awesome (and occasionally grouchy šŸ˜‰) @priapusiq.

It caught my eye for a couple of reasons...

  • Options wagers show doubts over Blue-Wave election narrative

  • With a Republican Senate, investors could come ā€˜piling backā€™

Rates traders are starting to question the big short position thatā€™s built up in long-maturity Treasuries on the expectation of a Democratic sweep in next monthā€™s U.S. elections.

In the market for options on Treasury futures, trades emerged in the past week that wager against a leap in volatility or a major breakout in yields heading into year-end. Specifically, they benefit from 10-year rates being capped around 1%, less than 20 basis points above current levels.

If these options traders are right, Treasuries could face a sharp reversal. Leveraged investors have never had a bigger bet on losses in bond futures. In the cash market, 10-year yields set a four-month high on Friday before retreating. But some traders see room for a contrarian take.

ā€œItā€™s now such a common narrative that there will be a Blue Wave and that thereā€™ll be an enormous amount of stimulus and it will be inflationary,ā€ said Peter Chatwell, London-based head of multi-asset strategy at Mizuho International Plc. But with a different electoral outcome, or even if polling starts to shift before the vote, ā€œthat could see some investors piling back into Treasuries.ā€

Ten-year yields rose about 10 basis points this past week, the most since August, ending at 0.84%. Thirty-year yields increased even more, by about 11 basis points to 1.64%, driving the spread over 5-year yields to the steepest since 2016.

So, I think it is INSANE how prevalent the blue wave narrative has become.

Not saying Biden won't win, but will the Democrats really get their blue wave?

Each side already has their faithful tribe votes in the bag.

A silent majority will decide this election.

It will be unenthusiastic Biden voters (who can't bring themselves to vote for Trump, but feel obliged to vote), or those famously shy Trump voters (who won't admit to their dirty little secret in case people judge them negatively).

There is every possibility of an uncertain 'outcome' on election day, and plenty of reasons to think it will be a lot tighter than the polls suggest.

As the article highlights, a blue wave is the common narrative, and leveraged investors have never been more short.

Just as we are heading into one of the biggest global risk events on the calendar, with implications that reach far into the future...?  

I fully expect this trade to unwind somewhat as we head into the election.

U.S. Fiscal stimulus

Here's the latest.

Big differences remain (on the same issues), and I will be amazed if anything gets done before the election now.

Pelosi says she remains hopeful...

Turkey is one to keep an eye on

It always is, but things seem to be escalating.

The Armenia-Azerbaijan fighting continues with new clashes reported on Friday (although a ceasefire has just been announced as I'm about to press send).

The U.S. embassy issued a security alert as they had received credible reports of potential terrorist attacks and kidnappings against U.S. citizens.

France recalled its ambassador on Saturday after Turkish President Tayyip Erdogan said his counterpart Emmanuel Macron needed mental help over his attitude towards Muslims.

ā€œWhat is the problem of this person called Macron with Muslims and Islam? Macron needs treatment on a mental level,ā€ Erdogan said in a speech in the central Turkish city of Kayseri.

ā€œWhat else can be said to a head of state who does not understand freedom of belief and who behaves in this way to millions of people living in his country who are members of a different faith?ā€ Erdogan added.

The U.S. is unhappy that Turkey (allegedly) tested a Russian anti-aircraft system last week.

Their economy is under pressure, as is the lira.

Financial sanctions could bring some fireworks.

S&P earnings bonanza: 183 of  the S&P 500 reporting this week.

Nothing of note on the Asian calendar.

Plenty of scope for some strange moves this week ahead of the election.

I will be doing my best Scrooge impression, holding onto my pennies unless something very compelling appears!