Profit taking is kicking in after a remarkable run in financial markets, with stocks adding more than 7% in the midst of the most controversial US election in decades.
Buy the rumour, sell the fact is an age-old adage in the markets and this week is shaping up to be a perfect example of that. Undeterred by the prospect of long-drawn out legal challenges and recounts, stock markets rallied strongly from the word go this week, ignoring the noise and instead rejoicing in an election result that delivers stability and no major overhauls as far as policy is concerned.
A split Congress is going to make it very difficult for Biden - who appears to be closing in on victory as the final votes are counted - to deliver on some of his more ambitious policies, many of which were widely viewed as market negative. The failure to secure the blue wave also means any stimulus will be smaller than it would have otherwise been but the way markets have responded, they're viewing it as a small price to pay for stability.
It has been astonishing at times how relaxed investors have been as events have unfolded - Trump declaring victory, threatening to go to the Supreme Court, making legal challenges etc - any of which may have undermined the vote and risked long delays. Investors have retained the faith in the process and are being rewarded but it seems the initial rally has run its course and cash is being taken off the table. Biden is likely to be declared the winner very soon and that fact is being sold.
The Fed unsurprisingly opted to keep its powder dry on Thursday, with the central bank being in no rush to ease and, I'm sure, having little interest in making a major policy announcement during election week. There would have been no sense in doing so and, should they choose to ease further, December isn't too long away and by then they'll be equiped with new economic projections and election week drama will have passed.
The RBA and BoE this week eased further as their economies suffer as a result of Covid, with the latter starting a national lockdown on Thursday. The ECB will join them in December when it will also have new economic projections and a better grasp of how bad the situation has become. It would be no surprise if the Fed eases too, especially given the failure on Capitol Hill to deliver much-needed stimulus prior to the election.
It's easy to forget that we'll get jobs numbers from the US today. Usually the highlight of the first week of the month, this time around it's barely been on the radar. The economy is expected to continue making progress, with employment expected to have risen by almost 600,000, taking the unemployment rate down to 7.7%.
While this is encouraging, the dreaded second wave is upon us and there's still no stimulus to shield the economy from the damage it cause. Who knows how long it will be before that arrives but the longer it takes, the heavier a toll it will take. And what impact will the election have? It doesn't look good.
Crude comeback cut short, time for OPEC+ action
The crude comeback has also run out of steam and WTI and Brent are around 3% lower this morning. It's been a phenomenal rebound this week, just as oil prices were falling to very tricky territory but with dialogue seemingly underway to push back planned increases of two million barrels per day in January, downside pressures have significantly eased.
It's time for OPEC+ to follow words with action though as statements earlier this week from Alexander Novak bought the group time but that will waver as Covid wreaks havoc and forces more lockdowns, weighing heavily on economic activity and demand in the coming months.
The key support levels for Brent and WTI now are once again $39 and $37, respectively. When this broke last week, the sell-off gathered pace. If it holds this time around, bulls may be encouraged. There may not be enormous upside but Brent did previously hit $44 on the expectations of delayed production increases so this level remains key. With WTI, $42 is key to the upside, but $40 could be an obstacle itself.
Gold bursts through major resistance
Gold has been really interesting over the last couple of days, bursting through near-term support and surging back above $1,950 today. The moves have been driven by a plunge in the dollar, as risk appetite has improved over the course of the week and we face the prospect of more Fed easing.
Barring a shock twist in the election, gold may remain a favourite in the near-term as central banks turn on the taps again. The downside risk for gold is Covid and with countries going into lockdown, it remains significant. The next key levels remain unchanged, $1,980 and $2,000 to the uspide, $1,930 and $1,920 below.
Bitcoin eyeing record highs
Another good day for bitcoin which broke back above $15,000 on Thursday for the first time since January 2018, falling just short of $16,000 today. These are remarkable gains in a very short space of time and feels reminiscent of what we were seeing late 2017 when the hype around bitcoin was incredible.
Clearly not an enormous amount has changed on that front. Central banks going back into easing mode may be the justification for some for the move, or the uncertainty around the election, but I'm not convinced. This feels like another highly speculative move and we've seen before, it can rise very far very fast, but the drop can be very painful indeed.