US equity indexes were lower on the week: DJIA -0.95%, S&P 500 -0.5% and NASDAQ -1.1%.
US equity indexes struggled to find direction and seemed to be in a holding pattern with US fiscal stimulus negotiations still ongoing and coronavirus cases rising both in Europe and the US. Unfortunately, today the US hit an all-time high in new daily coronavirus cases. You can see this in the chart below, which also breaks out the daily cases by US region – note growth in mid-west. (more discussion in coronavirus update section).
On the treatment/vaccine front this week, Remdesivir by Gilead Sciences (GILD) gained FDA approval to treat coronavirus – the first and so far only drug to have this status. Moderna (MRNA) said its vaccine could get US government authorization for emergency use in December. The AstraZeneca (AZN) vaccine trial, on hold in the US, got approval from the FDA on Friday to restart. WSJ reported that Pfizer (PFE) is setting up its “biggest ever” vaccine distribution campaign to ship billions of Covid-19 vaccines. On Thursday, the final debate between President Trump and VP Biden ahead of the US Presidential Election was held. (see US Presidential Election/PredictIt section).
Founder Jens Nordvig notes that the outlook for the USD in coming weeks will likely depend crucially on the outcome of the US election. US fiscal policy is key for USD. While Biden is the favorite to win the presidential election, the outlook for fiscal policy may depend crucially on the composition of the Senate. A clean sweep scenario in which Biden wins the Presidency and the Democrats control the Senate, would put the US economy on a path to fairly swift recovery, with important implications for key economic variables, including the unemployment rate, the US trade deficit and global growth. In fact, aggressive, front-loaded stimulus has the potential to bring the US economy back to pre-COVID trend by end-2021, especially if widespread vaccine distribution allows reopening of key service sectors by then. Big US fiscal stimulus will support global growth thus weakening USD in part via demand for global risk assets. There are other channels in which fiscal stimulus could impact USD, including via the US external balance and the fact that stronger US growth may not map into monetary policy tightening under the new AIT regime.
We note that the difference in the fiscal policy outlook is significant in a ‘clean sweep’ vs ‘split government’ scenario. In our twitter-survey from mid-October, we detected a ‘consensus difference’ in expectations of roughly $1 trillion. As illustrated below:
On Friday, Jens and team held an online client presentation The Big Picture for the USD, which discussed our overall USD view, counter currencies, our modelling of how big US fiscal stimulus will impact the US external balance, the big flows that matter for USD trends, and what the market has priced in. If you are interested in a replay of this presentation and/or our data and strategy services — institutions, please reach out to us here.
In the meantime, Head of Asia Pacific Grant Wilson talked to Aus Biz about the US Election, prospects for the US Senate, and what the November 4 Asia trading session could look like. You can watch the interview here.
Ahead Next Week: select economic releases:. Monday, Oct 26: German IFO (Oct), US New Home Sales (Sep), SNB Chairman Jordan Speaks, NZ Trade Balance (Sep) Tuesday, Oct 27: Mexico Trade Balance (Sep), ECB Bank Lending Survey, US Durable Goods Orders (Sep), Australia Q3 CPI, Wednesday, Oct 28: US Goods Trade Balance (Sep), BoC Monetary Policy Decision/Monetary Policy Report/Press Conference, Australia NAB Business Confidence, BoJ Monetary Policy Decision/Outlook Report Thursday, Oct 29: German Unemployment Change (Oct), ECB Monetary Policy Decision/Press Conference, US GDP Q3, US Initial Jobless Claims, US Pending Home Sales (Sep) Friday, Oct 29: Q3 German GDP, Eurozone CPI (Oct), US Personal Income/Spending (Sept), Canada August GDP, US U of Mich Sentiment, China Manufacturing PMI (Oct).
USD broadly weakened this week. The DXY Index traded above and below 93.00 this week, ending at 92.72. Note, 92.00 is key support near-term. GBP moved above 1.3100 on Wednesday reaching 1.3170 on headlines that Brexit talks would resume. JPY strengthened to a low of 104.34 despite the US 10 yr yield rising. EUR gained steam throughout the week ranging 1.1703-1.1878. This helped push the DXY to a low of 92.48 as EUR is its largest component. Despite dovish tones from both RBNZ and RBA, NZD outperformed AUD this week. MXN continues to trade well. We look forward to trade data next week to get a read on the whether exports continue to rebound.
US Presidential Election & PredictIt Data
Our heatmap below for US states shows 2020 US Presidential Election Betting Odds, Biden % point lead daily. The last US presidential debate of this election cycle was held on Thursday, October 22. PreditIt data show that betting odds shifted a bit toward President Trump post-debate. Ohio and Iowa odds shifted deeper toward Trump. Florida odds are neutral/slightly to Trump. President Trump has been campaigning heavily in Florida post his Covid treatment. North Carolina is neutral. Pennsylvania and Arizona odds are in Biden territory but less so. Wisconsin and Michigan odds are in Biden territory.
See here for a heatmap that shows Biden *daily change* in % point lead – one can see the shifts a bit more clearly.
International: The trend in new cases in Europe continues to deteriorate and broaden with Spain, France, UK, Italy, Germany, Belgium, Netherlands, Romania, Poland and Austria all posting new highs in daily case counts (within our top 60 countries by total cumulative case count – see individual country charts here). With cases in Europe blowing past the US second wave, in recent days (chart below), and our estimate of the case fatality rate having plateaued, we now expect daily fatalities in Europe to exceed those in the US in coming weeks for the first time since mid-April.
US: National case growth shows signs of a clear 3rd wave. As mentioned above, today daily new cases surpassed the peak in the 2nd wave observed in mid-July. We continue to see case growth in the Mid-West now spreading West and South. Given the potential role of colder temperatures, the so far very gradual pickup in cases in the Northeast (Rhode Island, New Hampshire, Vermont, and to a lesser extent Massachusetts and Connecticut) bears watching as we head further into the New England autumn. Our heatmap here shows the trend of daily growth in confirmed coronavirus cases among US states, along with the trend of daily testing hit ratios.
As case growth returns to the US, we are focusing on hospital pressure. We introduced a new chart this week: US States’ Current Hospitalization vs. Peak, per million. View it here. It will be updated daily on our Twitter feed. Wyoming, Iowa, and North Dakota (among others) are at their peak hospitalizations. North Dakota, South Dakota, and Montana have the highest hospital pressure in per capita terms.
Covid and US Election: As the US election nears, we are thinking about COVID’s potential impact on voting preferences. Below, we focus on major battleground states and note that the median state is already seeing a surge in realized fatalities due to the jump in case growth we’ve been tracking in the Mid-West (chart). Indeed, Wisconsin is in line with the growth observed in the median state. However, Pennsylvania and Michigan, which have seen stable deaths in October, are slated to see important accelerations in coming weeks. This is an important dynamic to watch as we know from the 2016 election that voters can wait until the last few days before making their voting decisions.
MarketWatch did a nice big picture overview on how mobility data has been used to track coronavirus and the economy in 2020, with some key quotes and thoughts from Jens.
Head of Asia Pacific Grant Wilson has a new column in the Australian Financial Review: Careful not to wipe out on the Blue Wave. “The main event of a dramatic year is now under way. As was the case ahead of the US election in 2016, investors would be well advised to brace for some epic volatility.”
Senior Strategist Alex Etra was quoted by Bloomberg in the article The Fed Has Trained Bond Traders Not to Push Yields Up Too Far. “If the U.S. recovers more quickly on the back of robust fiscal stimulus, and presumably a vaccine, we could see a move up in yields…But if you got a really rapid ramp-up that was at risk of derailing the recovery, that’s certainly a case where the Fed would step in. That’s not exactly yield-curve control, but it clearly is intended to reduce the probability that long-term yields rise.”