It's not all doom and gloom
A bumper day of tech earnings on Thursday failed to inspire confidence in investors, with Europe in the red and US futures more than 1% lower ahead of the open on Wall Street.
It's been one of those weeks, reports on the last quarter have been very encouraging and ordinarily the mood would be far more buoyant. The US recovery in the third quarter was very strong, big tech delivered more earnings beats and even Germany, France, Italy and Spain have this morning recorded above expected growth data for the third quarter. Unfortunately, this doesn't tell the full story.
As Christine Lagarde alluded to on Thursday, the recovery in the third quarter has exceeded expectations but the fourth quarter is shaping up to be painful. The data is great but it's already old news, it won't help as economies are forced to shutdown again. There's no momentum, no v-shapes, just an extremely challenging winter that is likely to be harder than the spring.
This is what makes the failure on Capitol Hill all the more appalling. When politics takes priority over the good of those they govern on behalf of, something is seriously wrong. Now we face an election that could bring with it considerable uncertainty at a time when Covid cases and hospitalizations are rapidly on the rise.
This hasn't been the best week for investors and the next few sessions may not see a dramatic improvement. Covid will continue to be a major downside risk, especially if we see the US going into lockdown in the way that's now happening across Europe. There are upside risks as well though.
The election may go quite smoothly and lawmakers may return and quickly come to an agreement without the distraction of the election. The Fed was exceptional earlier in the pandemic and there may be some muscle memory there, with the panic that delivered those remarkable days being less evident. A Covid vaccine would surely lift the mood. It's not all doom and gloom. But there may be some more downside to come yet.
How long will OPEC+ wait to push back January increase?
Oil is seeing a small recovery, up less than 1%, after falling back to its lowest level since late May, as Europe increasingly adopts new lockdowns and hits the demand outlook for crude. With WTI back around $35 and Brent coming close to $37, OPEC+ is going to start getting a little anxious. The next JMMC meeting is in a couple of weeks time; should the group hold out that long, I expect the January increase will be pushed back in order to support prices and rebalance the market.
Until then, barring any more verbal intervention, crude prices could broadly remain under pressure, with $40 providing a ceiling for any Brent rallies. The Saudi Energy Minister has previously warned against shorting the market, suggesting that it will be a painful exercise. Traders aren't deterred just yet but it may provide some support to the market and stop it falling as far as it otherwise would. $35 will be an interesting psychological test for Brent.
Short-term pain for gold
The dollar is firmly back in favour as traders seek out safety at the expense of riskier assets. It still feels strange to put gold in that category but the evidence is there for all to see. The dollar has surged in recent days, although it is seeing some profit taking today, while gold has tumbled out of the lower end of its range and is testing its late summer lows, around $1,850.
A break below here could be a psychological blow for the yellow metal but I don't think it will be devastating. The next couple of years should be very kind to gold so any big drops are always going to pique the interest of traders. The next test will come around $1,800, should $1,850 fall, which I expect it probably will.