Week Ahead - No stimulus. No worries!

Plenty going on in the week ahead.

Before getting into that, let's talk politics.

Wait, don't go!

A dominant narrative has emerged ahead of the U.S. election.      

Equities had a strong week, with the S&P gaining 3.8%.

In theory, this shouldn't happen in the month before the U.S. election.

Yet this dominant narrative is clear.

As far as the markets are concerned, the U.S. election is in the bag.

Biden is the clear favourite, reducing the contested election risk (which was probably overblown in the first place).

The lead is so commanding that Dems will get a clean sweep, retain congress, take control of the senate and spend, spend, spend.

I disagree somewhat (who can tell when a political event is fully priced in?), but a Biden sweep is certainly being priced in.

The spending narrative is not outlandish either.

Some Democrats felt the original stimulus proposal (at 3.6 trillion) was insufficient.

2.2 trillion was the absolute minimum that the majority could accept.

Alex Barrow explains and frames the Blue Wave case superbly in this podcast.

(If you're in a rush, the first 25 minutes is key).

So that's the consensus.

Everyone is looking beyond the election now, and one way or another, the U.S. is spending it's way out of this.

So, what could upset the apple cart?

Well, it's probably too soon to rule Trump out entirely.

The polls have been wrong before (more on the polls in a sec).

If they agree the stimulus bill, he is going to claim the credit.

If they don't, he's going to blame the Dems, say that he wanted to do even more than they did, but because they are really bad people, it didn't happen.  

Trump is a buffoon in many ways, but excellent at framing everything in his own favour.

The public messaging is clear, and if stimulus passes you know what he'll be saying.

Man of the people and for the people. Donald J Trump.

While the stimulus bill is still in play, equities should keep grinding higher.

Once the stimulus passes, equities should push on some more.

Spotting the theme?

However, if Trump picks up in the polls, or the narrative starts to shift towards a closer battle in the key swing states then risk may take a breather, particularly if the stimulus has already been passed and digested.

Nonetheless, a Trump win is not considered negative for equities in the slightest.  

Uncertainty over the composition of the senate/congress, and perhaps some worry over acceptance of the result are the main risk factors that could see markets pull back in the short term.  

Overall, any pullback should be a mere bump in the road for equities.

Almost every election outcome is considered bullish.

The problem with polls is...

According to this poll, there's a problem with polls.

Ok, so it's a small sample size, but worth a read, and shines some light on the 'shy Trump voter' (or 'silent majority') theory.

The study found that many people don't trust pollsters.

Republicans, Independents or Trump voters are more likely to lie in their responses or refuse to engage in conversation.

It makes sense.

Consider how toxic the political atmosphere is currently.

There are very real fears of being labelled racist/intolerant of the wrong group.

Then the cancel mob comes after you, and now you have a black mark on your permanent record.

Although these fears are not rational (there's a very low probability of getting caught up in this kind of stuff), why would anyone take that chance?

Would it really be that surprising if the polls turned out to be wrong again?  

Right, that's plenty on the polls.

The stimulus talks will continue this week.

As things stand, Pelosi says it's insufficient. GOP say it's too much.

Or so the stories go.

The fact that they are still talking suggests that the deal is there to be done.

Can't get away from the politics.

Let's hope it gets resolved next week.

That intro was longer than intended, but U.S. politics is likely to dominate the news flow again.

The main things I'll be watching next week.

USD

Quick note, U.S. bond markets are closed Monday (Columbus day), but stocks trade as usual.

USD short positioning has eased slightly of late, yet remains relatively extreme.

In the absence of a catalyst to challenge the dominant narratives (stimulus coming soon, blue sweep, more stimulus), then it makes sense that USD should continue to weaken.

The consensus seems so entrenched now that even a failure in stimulus talks wouldn't result in genuine risk off behaviour for long.

If there is to be a stronger USD pre-election, Trump needs to narrow that gap.

Interesting perspective on the relationship between USD & and the yield curve;  

EUR

Speculators reduced Euro longs by 14k.

Positioning is still relatively stretched: 174k net long contracts.

Lagarde & Weidmann ensured their message was heard last week.

ING went with EUR: Defying the ECB as their headline.

But what are the ECB going to do?

A rate cut won't do much, so the only option is more QE, under whichever acronyms they can think of.

Great.

Except everyone knows it doesn't work.

Inflation is persistently below target, and looks likely to lag behind the rest of the G10 for a long time to come.

The ECB takes a back seat for now.

It's time to get back to politics.

While every country is merrily announcing how they will spend their billions, the recovery fund isn't even ratified.

ICYMI:

Last week, the talks didn't get off to a good start.

Talks should continue on Wednesday, ahead of the EU council meetings.

It is unlikely that there will be a quick resolution, and the summit may put the disagreement in the spotlight.

At some point, this is sure to weigh on investor confidence, and see the Euro sold.

New lockdowns being announced throughout European cities will not help matters.

GBP

New Covid measures are to be announced on Monday.

We will also see the latest Brexit posturing heading into the European Council meeting.

There is little doubt that negotiations will continue, although GBP is sensitive to the rhetoric (and those mysterious sources who love to pour cold water on any signs of progress).

JPY

ING are spot on with their assessment;

OIL

Fascinating dynamics in the oil market.

Hurricane Delta has shut in 92% of oil production in the gulf of Mexico.

Norway strikes look to be over almost as quickly as they began.

Libyan oil production is coming back online at the Sharara oil field, bringing total output to 600k bpd within 10 days.

OPEC+ are expected to increase their output by 1.9mln bpd in 2021.

JPM aren't so sure.

The OPEC report will be released on Tuesday.

Oil Outlook 2021 - Searching for a new equilibrium

Q3 earnings season also kicks off this week, with the big banks in focus

The earnings themselves are unlikely to have much of an impact, but always worth monitoring the statements for any surprises.

Enjoy the rest of your Sunday!