Virus Situation Continues to Worsen

More government stimulus to support the economy becomes increasingly necessary as time passes.

Relatively quiet day, but with the virus situation getting worse in Europe. Social distancing measures will likely increase as the weather gets colder. More government stimulus to support the economy becomes increasingly necessary as time passes.

TRADING PLAN

Gold & Silver — Strong support for Gold is at 1850–60 and for silver is at 21.80–90. Traded weak and looked like there was going to be another wash-out but recovered strongly. Positive price action is encouraging, stay on course!

Key risks — Stimulus headlines, US yields and the strength of the USD remain as key drivers of risk sentiment. Equity weakness seems to have a lessening impact on precious metals for now.

WHAT HAPPENED YESTERDAY

Market Movements as of New York Close 16 Oct 2020

The strong start was mainly attributed to news that Pfizer (PFE 37.96, +1.41, +3.9%) may file for emergency use authorization for its COVID-19 vaccine by the end of November, and retail sales increasing 1.9% m/m in September (expected +0.6%). The retail sales data had overshadowed an unexpected 0.6% decline in industrial production for September (expected +0.6%).
The U.S. budget deficit hit a record $3.132 trillion during fiscal 2020, more than triple the 2019 shortfall, as a result of massive coronavirus rescue spending, the U.S. Treasury said on Friday.
Dollar edged lower (-0.19%) against a basket of currencies on Friday, paring some of the week’s gains (+0.67%) built on increased caution over a global surge in coronavirus cases and fading prospects for a U.S. stimulus package before the Nov. 3 election. Fresh restrictions to combat COVID-19 have been introduced across Europe, and the U.S. Midwest is battling spikes in new cases, threatening to derail the country’s economic recovery from the coronavirus shock. The safe-haven JPY was headed for a weekly gain of 0.2% against the greenback as investor appetite for safe haven assets remains strong. GBP erased the bulk of its early gains (+0.38%) to trade slightly higher on the day in a choppy session on Friday, after British Prime Minister Boris Johnson told businesses to get ready for a no-deal Brexit.
S&P 500 (+0.01%) finished little changed on Friday after being up as much as 0.9% early in the day. The Dow Jones Industrial Average outperformed with a 0.4% gain, while the Nasdaq Composite (-0.4%) and Russell 2000 (-0.3%) slipped into negative territory as selling picked up into the close on no specific news.
The weakness in the transportation space was mitigated in the industrials sector (+0.7%) by nice gains in Boeing (BA 167.35, +3.11, +1.9%) and Caterpillar (CAT 168.75, +3.71, +2.3%). Boeing’s 737 MAX was deemed safe to fly by EU regulators, and CAT was upgraded to Overweight from Equal Weight at Wells Fargo.
Prime Minister Jacinda Ardern’s centre-left Labour Party won a landslide victory in New Zealand’s general election on Saturday as voters rewarded her for a decisive response to Covid-19. The mandate means Ardern, 40, could form the first single-party government in decades, and face the challenge of delivering on the progressive transformation she promised but failed to deliver in her first term, where Labour shared power with a nationalist party. Labour was on track to win 64 of the 120 seats in the country’s unicameral parliament, the highest by any party since New Zealand adopted a proportional voting system in 1996.
Of Ardern’s current coalition partners, the nationalist New Zealand First Party had 2.6 percent and the Green Party 7.6 percent. If she is unable to form a Labour-only government, she is expected to continue to rely on the minor Greens. A Labour-Green coalition would be the first fully left-leaning government since the 1970s, a scenario that would mean more taxes and an environment hostile to business. NZDUSD popped 0.19% on Monday’s open.

HEADLINES:

CHINA GIVES SHENZHEN MORE AUTONOMY FOR MARKET REFORM, INTEGRATION

China on Sunday detailed steps to grant more autonomy to Shenzhen, letting the southern financial and technology hub pilot reforms in market development and economic integration.

The changes announced by the National Development and Reform Commission include more flexibility to pursue reforms in areas such as land use and cross-border arbitration.

Last week President Xi Jinping visited Shenzhen to commemorate 40 years since it was established as China’s first economic zone.

Xi called for Shenzhen to strengthen property rights and the protection of entrepreneurs, saying the Shenzhen government will get more leeway to pursue reforms and become a model city.

Thematic Context: Did China just unofficially enter the “Tech War” with a powerful legislation that allows the CCP to veto any predatory American advancement on Chinese tech Intellectual Property? We think so and this adds a new dimension to the ongoing “Tech Thucydides Trap”. 1. The legislation is a warning shot to American threats on Chinese listed companies in the U.S. 2. It shores up and draws in investments towards Chinese jurisdiction/s (Hong Kong etc.) as it lays forth intent that China plans to ring fence its tech champions. This is positive for the RMB in the long run (USD/CNH grinds lower). — 30th Oct 2020
As tensions between Washington and Beijing rise, the potential decoupling of the world’s two largest economies presents significant risks, a prospect that is firming China’s resolve to shift reliance to its own vast domestic market. The gathering of the Central Committee, the largest of the Communist Party’s elite decision-making bodies, will focus on the 2021–2025 plan for the country’s social and economic development. It will be the 14th such plan since China embarked on rapid industrialisation under its first five-year plan in 1953–1957. We believe this will be positive for the CNH in the long run (USDCNH to trade lower over time). — 10th Sep 2020

REPUBLICANS IN A TWITTER RAGE OVER HUNTER BIDEN STORY

Senators will vote on Tuesday on whether to issue a subpoena to Dorsey following Twitter’s decision to restrict the New York Post article, which it said violated its policies on hacked materials. Officials expect members of the Republican majority to do so, and potentially to issue one also to Mark Zuckerberg, Facebook chief executive.

In response, senior Republicans have once more started talking about Section 230, the clause in a 1996 law that gives social media platforms immunity from being sued over content posted by their users. Republicans in the Senate are also making a renewed push to change the law, working on a bill that would restrict when companies should be granted Section 230 immunity, according to Senate officials. Such a bill is likely to build on proposals by Josh Hawley, the Republican senator for Missouri, that companies wanting legal immunity should be forced to show their political neutrality, as well as separate suggestions from the justice department that they should be forced to justify deleting any content.

Thematic Context: “Breaking up big tech dominance is good for domestic tech companies, but bad for the “behemoths” we have gotten so comfortable with i.e. Apple, Amazon, Google etc. In the push for deglobalization, a theme we have been harping on since early 2020, tech will not be spared in a real Sputnik race and it seems the threat is on the fringes of materializing. This can potentially be bad for risk-sentiment as “Big Tech” were the main components leading the rebound in risk appetite. There is no shame in taking some chips off the table during this period, especially into the tumultuous months of heightened volatility ahead.” — 19th Sep 2020

NEW CLASHES IN NAGORNO-KARABAKH; POMPEO SAYS TURKEY MAKES SITUATION WORSE

Armenian and Azeri forces fought new clashes on Friday, defying hopes of ending nearly three weeks of fighting over the Nagorno-Karabakh enclave, and U.S. Secretary of State Mike Pompeo blamed Turkey for inflaming the situation by arming the Azeris.

Turkey has increased military exports sixfold this year to its close ally Azerbaijan. Russia is close to both sides but has a defence pact with Armenia. News agency RIA reported the Russian navy had started planned military exercises in the Caspian Sea.

The hostilities, close to pipelines in Azerbaijan that carry gas and oil to global markets, are stoking concern in Europe and the United States that Turkey and Russia, already at loggerheads over Syria and Libya, will be dragged in.

Thematic Context: “Turkey used to be a “trusted NATO ally” and a reliable friend for U.S. administrations, however things changed since the advent of Erdogan and his religious radicalization and Trump’s administration only deepened the rift. Energy has always been the driver of geopolitics and the cause of wars over centuries, Turkey’s Gas find will not be overlooked by the superpowers and it can be a bargaining chip for Erdogan (which hegemonic faction will he pivot to?” — 21st Aug 2020
“We maintain our view and believe that our aforementioned comments are playing out. Erdogan is intentionally causing geopolitical rift in a time when deglobalization is running amok, is the intent to cause fracturing of alliance in the EU? It’s a key issue we should be abreast of as it seems the inflection point in the EU is currently Turkey, Russia & Belarus.” — 21st Sep 2020
“Erdogan has subtly made his ambitions and role of Turkey in the global order known. The goal is to restore semblance of the “Ottoman Empire” and for Turkey to regain its role in the global balance of power. This intent has been made clear with extensive logistics investment with regards to energy infrastructure, unabated pursuit for natural gas deposits within disputed waters, refusal to kowtow to Russian or U.S. demands in terms of defence and open support for the caliphate and muslim brotherhood. — 25th Sep 2020
As we have mentioned before, Turkey is large and powerful enough to make a difference and the outcasts from the new middle-eastern alliance with Israel may join the Turkish alliance in setting a new power structure in the region.” — 3rd Oct 2020

WEEK AHEAD

The virus reality has come back to bite markets just as investors were attempting once again to shrug off the gloom and doom. The daily frequency of tighter Covid restrictions being announced across Europe and dimming expectations of a pre-election stimulus deal by US lawmakers has put a dampener on risk sentiment over the past few days. Uncertainty about the US election and Brexit are adding to the market anxiety. With none of these outstanding issues expected to be resolved over this week, traders might have to make do with the flash PMIs for October for some guidance.