Despite the rally in US stocks on Friday, led by the technology sector, US stocks have fallen for four straight weeks. The jury is still out on whether equities and risk assets in general can rally in the face of a host of uncertainties in the weeks ahead including the potential for a contested US election, fading US economic momentum, lack of progress on “Phase 4” US fiscal stimulus and a resurgence in virus cases globally. What is clear, is that the road ahead is a rocky one, reflected in the fact that equity volatility (VIX) remains elevated and G10 FX options implied volatility around the time of the US election has spiked.
One of the main beneficiaries of this uncertainty has been the US dollar lately, much to the detriment of precious metals given their strong inverse correlation. It wasn’t that long ago that most commentators were writing off the USDs prospects and it’s still not clear that its recovery can persist. The USD has hit its highest level in 2 months but will likely struggle if equities can eke out further gains in the days ahead. In contrast, gold is trading around its lowest levels in 2 months. While these trends may persist in the very short term, technical indicators (eg Relative Strength Index) indicate approaching overbought USD and oversold gold levels.
This week, the main focus will be on the first US Presidential debate on Tuesday and US September jobs report at the end of the week. While the US jobs report will likely show a relatively strong (when compared to pre-covid levels) increase in hiring (consensus around 900k), the pace of hiring is likely to slow and employment is still likely to be at least 11 million lower compared to February. The battle for the new US Supreme Court Justice adds another twist, with President Trump announcing the nomination of Amy Coney Barrett and the Senate moving ahead to vote on this nomination this side of the election. This has changed the dynamics ahead of the election battle, energizing voters on both sides.
In Asia, China’s September purchasing managers indices (PMIs) and monetary policy decisions in India and Philippines will garner most attention this week. China’s economy is emerging from the Covid crisis in good shape, helped by resilient exports performance, with medical goods and electronics exports performing particularly well. This is likely to be reflected in China’s PMIs this week, which are set to remain in expansion territory. Meanwhile US government pressure on Chinese technology companies continues to rise, with the US government reportedly sanctioning China’s biggest chipmaker, SMIC. This may draw a retaliatory response from China, such as adding US companies to China’s “unreliable entities” list.
India’s Reserve Bank of India (RBI) monetary policy decision is likely to result in an unchanged outcome on Thursday. While growth has been hit badly due to Covid-19, inflation has also spiked to well above the RBI’s target, leaving the central bank in a difficult position on policy. Ultimately the RBI will have to ease monetary policy further, but it is unlikely to do so at its meeting on Thursday. India’s economy is fast heading for a double-digit plunge in growth this year and unfortunately virus cases remain at very high levels. The rupee has been resilient, however, and is unlikely to weak much further in the short term, even as the economy softens.