Australian dollar smashed as virus guts markets

See the latest Australian dollar analysis here:

Macro Morning

DXY took off last night:

The Australian dollar was hammered:

With EMs:

Gold puked:

Oil may halve here:

Metals fell:

Miners were flushed:

EM stocks gapped:

With junk. Watch EM for an early warning on more carnage:

Treasuries steepened, bizarrely:

Stocks are one bad day from delivering the greatest bearish double-top you’d ever care to see:

Westpac has the data wrap:

Event Wrap

German Chancellor Merkel announced fresh Covid-related restrictions, closing bars, restaurants and leisure venues for one month from Monday, but leaving most businesses operating, Officials will gather again in two weeks to assess the impact of the measures. The French government is poised to impose tighter restrictions after a night-time curfew failed to halt a surge infections. Switzerland closed nightclubs and imposed other new limits. New York cases topped 500,000, while hospitalisations in neighbouring New Jersey exceeded 1,000 for the first time since July. The two states, the early focus of the U.S. outbreak, have seen a resurgence in recent weeks.

US Sep. advance goods trade balance deficit narrowed to -USD79.4bn (est. -USD84.5bn, prior -USD83.1bn) due to the first pullback in imports in four months. Sep. wholesale inventories fell 0.1%m/m (est. +0.4%m/m) but retail inventories rose +1.6%m/m (est. +0.5%m/m), the latter related to pre-festive season stocking.

Band of Canada left is policy rate unchanged as expected, but the tone of its statement and subsequent press conference indicated potential to increase QE, despite an interim pullback in weekly bond purchases to CAD4bn from CAD5bn. Extended forward guidance and concerns over a slower future growth path due to prolonged COVID-19 impacts were noted.

Event Outlook

Australia: The Q3 import price index is expected to print at -2.0% as the AUD rebounds, offsetting higher fuel prices (prior: -1.9%). The higher AUD has also seen AUD denominated commodity prices fall, leading Westpac to forecast a 3.5% decline in the export price index.

NZ: ANZ business confidence will be finalised for October, the flash result earlier showing a rebound almost to pre-Covid levels.

Euro Area: The deterioration in Europe’s growth prospects associated with the ‘second wave’ of infections now being seen will start to impact the EC survey of economic confidence in Oct (prior: 91.1, market f/c: 89.6). The ECB’s policy meeting is also expected to highlight these intensifying risks.

US: GDP is expected to bounce back strongly in Q3 following a historic 31.4% decline in Q2. Household demand is expected to lead the recovery, with Westpac and the market seeing a 28% and 32% annualised rebound respectively. Initial jobless claims high level signal labour market churn and uncertainty, but pending home sales continue to show strength, having reached a record high as a result of low mortgage rates and households’ increasing desire for the best home possible (prior: 8.8%).

The virus is out of control, to put it mildly, with European and US deaths surging:

The sequence of risks is extreme. Europe is progressively locking down. We are only in October so this has six months to run on and off. It faces Hard Brexit and limited extra fiscal.

The US is entering an election that will likely result in a Biden Administration which will have to follow Europe’s example with at least partial lockdowns nationally and more intense lockdowns locally. Yet the incumbent Trump Administration is openly preparing a coup to steal the election and could use prospective lockdowns as a part of its war on democracy.

Even if we get through that, there is no fiscal support left for this year as partisanship takes over (there is still a chance of a lame duck senate passing a $500bn package by, say, Xmas) and any attempt to remedy the virus post-election by the Biden Administration will likely result in very serious civil conflict as traumatised Trumpians take to the streets.

As well, markets are positioned entirely on the other side of the boat. They are massively short DXY on the vaccine recovery and Biden stimulus trade:

And massively long stocks, especially those that benefit from a falling DXY such as tech, commodities, EM etc.

Markets have fully repeated the mistake of February 2020 and the Australian dollar is square in the gun.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. “Openly preparing a coup” indeed. Get a grip. Both sides will cheat as much as they can.
    Astrologers have said October 31 2020 for a financial market accident for quite some time now.

  2. DOW down 3.5%, before the election,
    I say its next move is down 10 odd precent.
    You probably cant see daylight from there
    MYR AGM today, watch that

    Update: Down dn 943.???

    • Careless in our summer clothes splashing around
      In the muck and the Myer

      Now hang me up to dry
      You wrung me out
      Too too too many times

      • Many puntrs feel the same
        But I’ve been loading on
        I think we are about to see a new game
        With Lew giving the board the gone

        • Solomon Lew
          Solomon Lew just doin’ the do
          And you are through
          And there’s nothing you can do

          GLTAH, God Bless, Selamat Jalan!

          • King was brought from the UK
            To turn the joint around
            But he has turned out to be a total f*uk
            And ran the company into the ground

          • And I need Lew now tonight (and I need Lew now)
            And I need Lew more than ever
            And if you only hold me tight (if you only)
            We’ll be holding on forever
            And we’ll only be making it right (and we’ll never)
            ‘Cause we’ll never be wrong
            Together we can take it to the end of the line
            Your mgmt is like a shadow on me all of the time (all of the time)
            I don’t know what to do, I’m always in the dark
            We’re living in a powder keg and giving off sparks
            I really need you tonight
            Forever’s gonna start tonight
            Forever’s gonna start tonight

        • truthisfashionable

          I put my now $50 worth of votes in the Lew…

          That resolution for performance rights for the CEO and MD really annoyed me this year.

          • To challenge My Fair Lady:
            ln Hertford, Hereford and Hampshire hurricanes hardly happen
            Hounsell has Hit the Highway
            May he never return

  3. chuckmuscleMEMBER

    I dont think this is entirely right: “And massively long stocks, especially those that benefit from a falling DXY such as tech, commodities, EM etc.”

    Tech benefits from the disinflationary, secular stagnation sweeping the globe as lower inflation, which is almost always accompanied by a higher USD, sees punters/asset allocators seeking out anything with prospects of growth = tech.

    Aside from that, I completely agree. The reflation trade positioning is crazy and to steal a quote from someone I can’t remember “if I had a dollar for every time someone said value’s turn is now, I’d almost be as rich as someone who invested in growth stocks”

    • If Lew boots the failed board and management of MYR
      that’ll make you rich, If you get in early.

    • That, ole Red Head, is called margin calls.
      the ASX is zacly the same.
      the inclination of the slope
      is an indicator of the PANIC

  4. The lockdowns in Europe are pointlessly destructive. Shutting bars and restaurants – what does this achieve? It simply forces people into supermarkets and disrupts the food supply system, whilst putting an immense strain on the working class who are employed at these shuttered venues.

    It just goes to show that European politicians are completely out of touch with reality and with their constituents.

  5. I guess given the Melbourne playbook. What is likely to happen in the EU is even after these lockdowns, cases will continue to surge higher leading to increasing severity of lockdowns through the months ahead. Cascade of increasing bad news. The EU approach will given Biden, assuming he wins more cover to mandate this approach to the US. Or will Trump wedge Biden saying what is happening in Europe is terrible and what Biden will do. Who knows, but volatility ahead for sure.