Increasing Volatility but Longer Term Thesis Still Holds

Increasing vol is never a good thing especially when it’s accelerating down moves in stock markets. With the Nov election looming, Trump can ill-afford an end to the bullish stock market which he has consistently brandished as the barometer of the success of his policies.

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TRACKRECORD DAILY

7 min readSep 9, 2020

We are now back to the levels of Nasdaq last seen in mid August. With Fed currently in their blackout period ahead of the mid Sep policy meeting, no soothing comments will be forthcoming, so it’s pretty much left to Trump and his admin officials to try to stem the rising fear.

For now, the sell-off seems pretty much limited to leveraged players from short term speculators and in particular, the retail sector. The higher net worth sector which typically would be killed in such a sell-off has reported been running very low leveraged since the bloodbath in March.

However, increasing vol is never a good thing especially when it’s accelerating down moves in stock markets. With the Nov election looming, Trump can ill-afford an end to the bullish stock market which he has consistently brandished as the barometer of the success of his policies.

In the short-term, the moves are going to be wild and random, but in the longer term, the thesis of higher asset prices and tech outperformance still hold. However, we all need to survive the short term to enjoy the long term. Size your trades appropriately and tread with caution.

TRADING PLAN

Gold & Silver -Consolidation continues. Tried again to sell off on equity weakness but came back nicely. Price action getting better.
AUD -

AUD/USD — Minor support level at 0.7250–60 broken and stronger support at 0.7190–0.7200 holding for now. More equity weakness may breach this support and positions will need to be reduced.

AUD/NZD — Support at 1.0790–1.0800 held, and it is now testing resistance at 1.0890–1.0900. Lighten up some though it looks likely to creep higher. 2Year NZD swap rate trades in negative territory for the first time is a sign of things to come.

3. EUR/JPY — Stuck in recent range of 124.40–50 to 126.40–50. USD strength and equity market weakness has pushed EURJPY down to test the low end of the range. Hold for now, and add should equity market stabilise.

Key risks US equity market weakness and possibility of higher USD yields leading to strong USD. For now, the imminent risk is continuation of equity market sell off. Proceed cautiously.

HEADLINES:

SENATE AIMS FOR THURSDAY VOTE ON SCALED-DOWN CORONAVIRUS AID BILL

The U.S. Senate later this week aims to vote on a drastically scaled-back Republican coronavirus aid bill, Majority Leader Mitch McConnell said on Tuesday, despite opposition from Democrats who are needed for any measure to be enacted into law.

The bill, which some senior Republican aides described as a $300 billion package that was reduced from the $1 trillion McConnell advocated in July, would face a vote on Thursday.

Barring a breakthrough, it could be the final attempt to pass a fifth coronavirus aid bill before the Nov. 3 presidential and congressional elections.

With Democrats holding out for a far more comprehensive bill to further stimulate the economy and help battle the coronavirus, McConnell said in a Senate floor speech: “We want to agree, where bipartisanship is possible … and then keep arguing over the rest later.”

Several attempts over the past several weeks to work out a deal between congressional Democrats and the Republican White House have so far failed, leaving the two parties more than $2 trillion apart.

Thematic Context: “We can move very quickly with the Democrats on these issues. We’ve moved quickly before, and I see no reason why we can’t move quickly again, Mnuchin said. And if there are issues that take longer, we’ll deal with those as well.” — 27th July 2020

“We believe Mnuchin, and this impasse is a movie we have seen before. A deal will come, or the markets will force it out of their hands. Any dips in the Nasdaq is a gift to be bought.” — 3rd Aug 2020

“Either Congress passes the bill, or the markets will force it out of their hands via a selloff. We maintain that any meaningful retracements (approx -10%) in Nasdaq can be bought.” — 9th Aug 2020”

REVERSING COURSE AHEAD OF ELECTION, TRUMP EXTENDS DRILLING BAN OFF FLORIDA

Trump on Tuesday signed an order to extend a ban until 2032 on offshore oil drilling in the eastern Gulf of Mexico off Florida as he seeks to win support in the state ahead of the Nov. 3 election.

The Trump administration — which has worked to expand U.S. oil and gas drilling and roll back Obama-era rules on pollution from fossil fuels — originally wanted to expand offshore drilling off many of America’s coasts, including Florida. But proposals for drilling off Florida prompted fierce opposition from tourism, real estate, and environmental interests.

“Just months ago, Donald Trump was planning to allow oil and gas drilling off the coast of Florida,” Biden wrote on Twitter. “Now … he conveniently says that he changed his mind.”

IN NEW BREXIT ROW, BRITAIN SETS OUT DETAILS FOR POST-EU LIFE

Britain will set out new details of its blueprint for life outside the European Union on Wednesday, publishing legislation a government minister acknowledged would break international law in a “limited way” and which could sour trade talks.

With talks with the EU all but stalled over fisheries and state aid, a statement from his Northern Ireland minister Brandon Lewis that the new bill would “break international law in a very specific and limited way” may only worsen matters.

The EU has warned Britain that if it reneges on the divorce deal there would be no agreement. London has repeatedly said it will respect the withdrawal agreement and Northern Ireland protocol, saying its bill contained only “clarifications”.

In a statement, the government hailed its Internal Market Bill as a way of empowering Britain and ending the reign of “unelected EU bodies”. “No longer will unelected EU bodies be spending our money on our behalf. These new spending powers will mean that these decisions will now be made in the UK, focus on UK priorities and be accountable to the UK parliament and people of the UK.”

DAY AHEAD

Bank Of Canada

BoC will announce its latest policy decision later today and it is widely anticipated to stand pat as Canada’s recovery gains traction. The combination of a strong monetary and fiscal response to the virus crisis in Canada appears to be bearing fruit. Both employment and consumption have picked up sharply and GDP growth accelerated to 6.5% month-on-month in June. With signs the recovery in the US has merely slowed rather than faltered from the virus resurgence, and Canada so far steering clear of a second wave of its own, the economic picture is looking up.

Like the Fed, the BoC is considering alternative methods to inflation targeting as its monetary policy framework is up for renewal next year. Recent remarks have fuelled speculation that the BoC could follow the Fed in adopting average inflation targeting, which could mean rates could stay at 0.25% for far longer than the two years currently being signalled by the Bank.

Such expectations could damage the CAD’s long-term prospects, but in the short-term, the currency could be boosted by hints from the BoC that it is satisfied with the progress of the recovery.

US equity sell off

All eyes on how the US equity trades today. Another day of aggressive sell-off with no rebound will likely lead to nervousness that will affect all other asset classes which have so far been relatively unscathed.