Markets navigate the Ro-Rotation trade, Sterling heads higher

Morning Note

The risk-on rotation trade continues to have legs for the time being but we could see this suffer a bit of payback before long.

Yesterday it still very much the driving force as the Nasdaq 100 fell almost 2% and the Russell 2000 small cap index rallied over 1.7%.

That left the S&P 500 almost flat for the session, closing a shade lower at 3,545. US Treasury yields rose, with 10s approaching the psychologically important 1% barrier.

US bond markets are closed today for the Veterans Day holiday and there is an empty data roster ahead, though we will be watching Christine Lagarde’s speech later.

Donald Trump continues to refuse to concede the election and Republicans are closing ranks around the president as they eye two Senate runoff races in Georgia. They know they need the Trump appeal to get the vote. Have markets been too sanguine about an impending constitutional crisis?

European markets were firmer again in early trade on Wednesday, with the FTSE 100 clearing 6,300 to hit its highest since the middle of June and it now trades above its 200-day simple moving for the first time since late February. A close above the 6,340 brings 6,500 and the post-selloff peak into view.

However it’s a bit more complex today than being all about the reopening trade – this week’s big gainers like Rolls-Royce and Compass Group are down, whilst Ocado, Kingfisher and Just Eat have risen. Rotation is not going to be a straight line – this reopening move is taking a bit of a hit this morning.

After the initial kneejerk, investors will need to work out now which ‘value’ stocks remain value traps and which have some growth in them. Expect pullbacks along the way but the overall landscape remains much more positive than it was a week ago for these sectors worst affected by the pandemic.

FTSE breaking free, eyes post-trough highs:

FTSE breaking free, eyes post-trough highs.

Sterling is making solid gains as Brexit talks continue and head towards, we hope, some conclusion. GBPUSD trades with a bullish bias towards 1.33, its highest since September.

EURGBP broke below 0.89 and trades under its 200-day simple and exponential moving averages – a key area of support. Sterling is thought to be among the biggest beneficiaries of a vaccine since the UK economy seems to have been hit hardest by the lockdown among the G10.

What’s less clear is whether sterling bulls get caught offside by a breakdown in Brexit talks before ultimately a deal is sealed at the last minute. They might be right but their timing may be wrong.

EURGBP sows downside momentum after closing under 200-day EMA:

EURGBP sows downside momentum after closing under 200-day EMA.

The Reserve Bank of New Zealand left rates on hold at 0.25% and signalled they would stay there until March 2021.

The central bank also met expectations for more stimulus by launching its Funding for Lending Programme, which will allow it to cut to negative should it require to – but a forecast upgrade for inflation to reach 0.9% in Dec 2021 vs the prior 0.3% expected signals the RBNZ is not about to go negative.

With broad USD weakness underpinning the risk-on crosses, the kiwi rallied as markets pared bets for negative rates. NZDUSD hit 0.69, nearing the March 2019 peaks around 0.6940.

Kiwi tests March 2019 highs:

Kiwi tests March 2019 highs

Elsewhere, crude oil continues to make gains with WTI (Dec) breaking free of the $41.50 range to test the next big level at $42.50 with momentum going one way in the aftermath of the Nov 2nd outside day reversal. API data showed crude oil stocks fell by 5.1m barrels last week, much more than analysts had expected.

Whilst inventories are still muddied by the hurricane-affected shut-ins on the Gulf of Mexico, crude prices are riding the Pfizer-led risk rally.

Nevertheless, near term supply pressures and lockdowns ought to be weighing on demand in the next few months. Expect a significant amount of chatter around the OPEC+ deal ahead of the meeting starting Nov 30th.

rude oil continues to make gains with WTI (Dec) breaking free of the $41.50 range.

Joe Biden declared president-elect, stocks rally

US Presidential Election

Joe Biden has been declared president-elect, but Donald Trump is refusing to concede. Markets are not particularly fussed and see some clear light – relative clarity is providing a boost to risk assets.

Stocks enjoyed the best week since April, though there was some payback on Friday as traders consolidated gains.

The S&P 500 rallied 7% over the five sessions, but this did come after just about the worst pre-election week for stocks on record. Investors were shifting a lot of flow into lower volatility debt markets ahead of the election to reduce exposure to stock market volatility, and this is now unwinding back into equities.

In particular, the Biden White House and split Congress ought to mean lower rates, lower inflation and this benefits Growth stocks, and gold.

The dollar index has slumped to its weakest since September 1st put tried to rally early on Monday. A weaker dollar is supportive for gold, which broke out past $1,950. WTI (Dec) tracked sideways around the $38 mark.

Stocks in Asia rose, with the Nikkei up 2% and Hang Seng rising over 1%. Stocks opened firmer in Europe with the bullish trend asserting itself as Biden’s triumph seems all but assured.

The FTSE 100 rallied 1.5% to 6,000, whilst the DAX rose 1.7% to 12,700 and the Stoxx 50 returned to 3,250. US futures indicate Wall Street will open higher after a lacklustre session on Friday.

It would take a lot of big and unlikely legal victories for Trump to turn the result now. Recounts are likely as are multiple legal actions – but the lead for Biden is such that it would imply some enormous voter fraud in several states. Safe Harbor Day is Dec 8th, by which date all states need to have decided who’s won ahead of the Electoral College votes on Dec 14th.

The MSCI All Country World Index hit a record intra-day high this morning. A Biden win is seen to be much better for international cooperation, an end to the Trump-era isolation and critically, good for trade with the potential for a reset in transatlantic relations probably the most exciting aspect for investors. Whilst the Democrats won’t go easy on China, the relationship is expected to be steadier and escalation of tariffs seems less likely than under Trump.

According to weekend data Chinese exports jumped 11.4% in October, whilst imports rose 4.7% in USD terms. This was the best export performance since the pandemic and shows the recovery taking place outside of those countries where lockdowns linger.

It’s a good indicator that global demand is picking up in spite of pandemic restrictions in certain areas. This morning saw some decent German export numbers for September (+2.3%), but France’s economy is operating down 12% in November due to the lockdown.

After the relief rally, where next?

The Senate looks to be heading for Republican control, which removes a lot of the regulatory and tax overhang. Georgia run-offs will keep us unsure for a while longer, but the odds favour a very slim Republican majority in the upper house. Gridlock could be good for multiples and earnings longer term, but it’s not conducive to a large stimulus package right now.

And will Biden go for a more aggressive approach to containing coronavirus? We know that the greater the restrictions the greater the economic damage. Europe is enduring this reality again. A Biden win is probably good news for clean energy companies – the president-elect is committed to re-joining the Paris Climate Accord. Scottish Widows is offloading £440m in ESG unfriendly investments – the wind is blowing only one way.

Sterling was holding well above $1.31 but dollar weakness aside, the pound remains susceptible to a significant amount of Brexit headline risk.

Boris Johnson and Ursula von der Leyen said ‘significant differences remain’ in trade talks, citing fishing and the provisions for a level playing field. All the showboating and posturing should give way to pragmatism and the realpolitik of securing a deal before the New Year. The current ‘deadline’ is November 15th but talks could well extend beyond this. After tapping on 1.32 briefly early doors, GBPUSD dropped to 1.3140 by around 9am.

The FTSE 100 hit 6,000 and seems to have broken the downtrend. Next to 6,300, or will the downtrend reassert itself? The jump this morning marks a clear move off the 50-day simple moving average at 5,888 and the 100-day simple moving average at 6,011 offers resistance.

FTSE 100 performance fluctuating.

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