Week In Review: October 2, 2020

US equity indexes posted modest gains for the week:  DJIA +1.9%, S&P 500 and NASDAQ rose +1.5%.

This was a news and headline heavy week. It started with a contentious first US presidential debate and ended with US President Trump unfortunately announcing via Twitter that he tested positive for Covid-19 and news that he was taken to Walter Reed Military Hospital for precautionary measures. In between, there was Round 9 of Brexit negotiations, the ECB and Its Watchers Conference, and a below expectations US payroll report for September.

Our Head of Political Risk Analysis, Wouter Jongbloed, took a look at what would happen to President Trump’s position as nominee for the Republican Party should he have to be replaced prior to the election.  Wouter notes that since the candidacy of (President) Andrew Jackson (1828), political parties have selected a replacement candidate for President if the original candidate vacates the nomination. Both the Republican and Democratic party have by-laws to address this process. Generally, the Party Chair would convene the National Committee, and the Committee members would vote to fill the vacancy on the ticket. Should State Electors already be appointed, the Party would then instruct its electors to cast their votes accordingly in the Electoral College. The laws around State Electors are a combination of State Law and Constitutional provisions and some may be able to disregard the instructions from the political party. On the question of whether the presidential election can be postponed, Wouter states, “It is highly unlikely the popular vote will be postponed on account of a vacancy on a political ballot. Although this is within the power of Congress.”  (See section below: PredictIt & US Presidential Election for heatmap/charts on how President Trump’s COVID announcement has shifted odds for the election).

Moving to politics across the pond, Round 9 of Brexit negotiations concluded this week. Wouter, Head of Political Risk Analysis, says that there remains an important distance between the EU and the UK on several key areas, including assurances that the EU and UK will maintain a “level playing field” come January 1. Following inclusive talks, PM Johnson will talk to EC President Von der Leyen today (Saturday). Wouter notes that “The path to mobilizing sufficient political will to get a deal done is likely to require movement not only by the UK, but also by the EU Member States.” Dutch PM Rutte is on the record Friday saying he is “cautiously optimistic” that an EU/UK trade deal will be agreed “this Autumn.” PM Rutte moreover indicated that a deal was a “geopolitical necessity.”

Turning to the ECB, the central bank held its conference The ECB and Its Watchers XXI. ECB President Lagarde gave a speech: The monetary policy strategy review: some preliminary considerations. Senior Advisor Chris Marsh notes that what he found the most interesting was the discussion of monetary-fiscal interactions and explicit reference to the “appropriate design of Europe’s fiscal framework.”  Chris notes that revising the fiscal rules is clearly important, but this emphasis potentially creates the scope for the ECB to take the lead on the new fiscal framework. If indeed they have been given the implicit go-ahead to do so then they could contribute positively to this debate in a way fiscal policymakers cannot. Chris says, “If they ‘take the lead’ on what fiscal policy should be doing and a monetary framework to support this, then this is the best news I have heard in a while. But it is still early days.” 

Interested in our central bank balance sheet updates on the week?  You can find them here: ECB, Eurosystem and Bundesbank, Fed.

Ahead Next Week: select economic releases:
Sunday Oct 4: Australia NAB Business Confidence (Sep), Japan Services PMI (Sep).  Monday, Oct 5: Germany Services PMI (Sep), EZ Markit Composite PMI (Sep), UK Composite PMI (Sep), EZ Retail Sales (Aug), US ISM Non-mfg PMI (Sep), NZ NZIER Business Confidence (Q3), Australia Trade Balance (Aug), RBA Interest Rate Decision. Tuesday, Oct 6: US Trade Balance (Aug), Canada Trade Balance (Aug), China Exports/Imports. Wednesday, Oct 7: Canada Ivey PMI (Sep), US FOMC Minutes, Japan Current Account (Aug). Thursday, Oct 8:  Germany Current Account & Trade Balance (Aug), US initial jobless claims,  Japan Household Spending (Aug) & GDP. Friday, Oct 9: UK GDP (MoM), UK Trade Balance (Aug), China FX reserves, Canada Employment (Sep).
 

USD Comment & October Seasonality 

USD broadly weakened this week after strengthening the previous week (ended September 25). VP Biden’s debate performance combined with hope for more fiscal policy, including possible aid for the airline industry, seemed to keep US equity indexes stable and the USD on its backfoot.  DXY ranged 94.63 – 93.55, ending the week at 93.80.  US President Trump’s COVID announcement on Friday impacted safe-have JPY – USDJPY fell to 105.02 from the 105.65 area post President Trump’s tweet before coming back to 105.33 by end of NY session. The market is awaiting more developments on this front, but we note that, of course, President Trump will receive better and earlier treatment than most.  EURUSD range: 1.1615 – 1.1763; GBPUSD range: 1.2751 – 1.2970 – moved around by Brexit headlines.  Higher beta NOK and MXN gained vs USD this week, helped by US equities. 

As it is the first week of October, we take a look at USD seasonality. Below is our proprietary FX seasonality table. USD strengthens vs most of G10 FX in October – the exceptions are vs AUD and NZD, where USD is seasonally weaker. USD is stronger to mixed vs EM FX. Weaker vs BRL, CLP, TRY. Stronger vs. COP, MXN, RUB. 

 

PredictIt Data & US Presidential Election

Our heatmap below for US states shows 2020 US Presidential Election Betting Odds, Biden % point lead daily. Overnight Oct 1st into Oct 2nd, at 12:54am EST, President Trump announced via his twitter account that he and the First Lady had tested positive for coronavirus. PredictIt data, seen on our heatmap, show a shift toward Biden on October 2nd.  

Separately, on October 2nd, PredictIt also showed a jump in US Presidential Election call odds on November 3 – election day. 

 

Coronavirus Update

International: The international picture is very mixed. Key EMs are showing better trends, including recently India. But Europe, for the most part, remains on a worsening trend.  All told, we are increasingly seeing a continued process of policy tightening and relaxation that is keeping the virus at bay, but not avoiding repeated outbreaks. This is likely to remain a key theme, and the question is whether colder weather in the North is going to pose an additional challenge.

US: Growth trends in the US are mostly steady. But we are experiencing growth in Wisconsin and Iowa on a sustained basis, and hit ratios are also moving higher in those states, suggesting a larger unrecorded outbreak. While not particularly important for economic activity, it may impact the election outcomes, but at state and national level.

The chart below compares second waves in the US and Eurozone.  Our deaths forecast for the Eurozone remains moderate, and well below that for the US.

 

Exante Data Product Launches & Happenings

Jens joined @thalesians this week to talk “Forecasting USD using capital flow data.” In this presentation, Jens demonstrates some of Exante Data’s proprietary charts and analytics – it is a good sneak peak into some of our data and analytical tools available only to clients. You can watch the presentation here.

We held a live online presentation for clients with our team on the topic: What Happened to the European Recovery? We discussed the status of the European 2nd wave, the outlook for the economy, and implications for European monetary and fiscal policy and asset markets.
 

Bloomberg users – you can view Exante Data tweets on the terminal. We update charts and commentary daily there.  Users can type into the blue command line: TWEETS BY EXANTE <GO>. Alternatively, to add to Launchpad:  1. Run SOCI <GO> 2. Type into the orange box Exante 3. Select the handle at the bottom “TWT_EXANTEDATA” 4. Click the white LLP <GO> to Open in Launchpad to view in Launchpad mode 5. To save the search >>> Click Actions in the top red tool bar >> Save Search

For more information, to inquire about the European Recovery presentation replay, and/or to see a demo of our data platform, institutions — please reach out to us here.

Media

Founder Jens Nordvig joined  the Bloomberg “What’d You Miss? This Week” podcast.  He talks the state of the global recovery and whether there is a clear data correlation coronavirus cases and economic indicators. Podcast here – see marker 31:03 for Jens. 

Senior Advisor Brad Setser has a new blog out for the Council on Foreign Relations – Chasing Shadows in China’s Balance of Payments Data. “China’s second quarter balance of payments data points to a significant increase in the foreign asset accumulation of the state banking system. That at least raises the question of whether China’s authorities are resisting pressure on the yuan to appreciate.”

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