U.S. Election Day Has Come, and Stocks Are Rallying Around the World

November 3, 2020

There is a mood of trepidation this Election Day. Record numbers were cast early, and the choice is considered the starkest in living memory. Fears center on the possibility of a contested outcome and ensuing violence, with interference from cyber meddling and other glitches in counting the results.

Despite widespread agreement that America is going in the wrong direction, stock markets have rallied further overnight in Asia and Europe, and U.S. futures are up over 1.0%. Share prices closed up 1.9% in Australia, 2.2% in Singapore, 2.0% in Hong Kong, 1.9% in South Korea, 1.4% in China, and 1.3% in India. In Europe, stock markets have climbed at least 1.5% in the U.K., Germany, France, Italy, Spain and Switzerland.

Japan‘s market, which advanced 1.4% on Monday, was shut for Culture Day.

Today’s spurt in risk taking has elevated sovereign debt yields and depressed the dollar. 10-year yields have climbed three basis points the U.K. and U.S. and by two bps in Germany. Overnight dollar losses amount to 1.5% against the Mexican peso, 0.9% relative to the Australian dollar, 0.6% versus the New Zealand and Canadian currencies, 0.5% vis-a-vis the euro, 0.3% against the Swiss franc, 0.2% versus sterling and 0.1% relative to the Chinese yuan.

The price of West Texas Intermediate crude oil advanced 3.9%, aided by reports that Russian production constraints may get extended. Gold is 0.4% firmer.

Policymakers at the Reserve Bank of Australia enacted their first Overnight Cash Rate (OCR) cut since March and introduced a program of government bond purchases, which will total A$ 100 billion over the coming six months and likely continue longer. Although the short-term economic outlook is better than at the time of the last full review three months ago, it’s become apparent that the medium-term prospects for recovery from the severe recession brought on by the pandemic is going to be “uneven and drawn out.” Today’s announced actions to lower the entire Australian yield curve are meant to complement fiscal policy stimulus and particularly to lend support to job creation and overall recovery in economic activity. So the OCR, which was cut twice in March by 25 basis points each time, now falls to a record low of 0.10%. Target yields for 3-year sovereign debt and the Term Funding Facility also drop to 0.1%, while the rate on Exchange Settlement Balances falls 10 basis points to zero percent. And while job creation is the top short-term policy priority, the RBA’s statement after today’s meeting underscores that the inflation target of 1-3% remains the “cornerstone of the monetary policy framework.” For now, there is no conflict between the two mandates, as officials are projecting very low wage and price inflation in 2021 and 2022. The initial hike of the OCR is likely at least three years away and will not be engineered until actual inflation is sustainably within target and wage growth has materially accelerated as well. The end of quantitative stimulus will precede the first interest rate hike.

Today’s other announced central bank interest rate decision was made by Bank Negara Malaysia, where officials left the overnight policy interest rate at 1.75%. The rate began 2020 at 3.0% but was cut by 25 basis points in January and March and then by 50 bps in May and 25 bps in July. Officials consider 1.75% appropriate and sufficiently accommodative. A released statement observes significant improvement in economic activity and slower growth this quarter. Sub-zero inflation this year will give way to a rising trend in 2021.

Price data released overnight showed

  • A 15-month high in Turkish producer price inflation of 18.2% in November, up from May’s trough of 5.53%. Turkey continues to grapple with a vicious cycle of currency depreciation and internal price inflation. Consumer price inflation of 11.89% last month marked a 4-month high.
  • Swiss consumer price inflation remained negative for a ninth consecutive month in October, but the on-year drop of 0.6% was 0.2 percentage points less than in September and the least negative in seven months.
  • Consumer prices in South Korea slumped 0.6% on month in October, which drove the year-on-year comparison down to a 4-month low of +0.1%.
  • Romanian producer prices dipped 0.1% in September, resulting in the most negative year-on-year change (-0.9%) since May.

Non-oil purchasing manager surveys of Egypt, Saudi Arabia and the United Arab Emirates in October were published today. The Egyptian index rose a full point to a 70-month high of 51.4, and the Saudi reading went up 0.3 points to an 8-month high of 51.0. In each of those cases, however, jobs continued to be shed, and Covid continues to dampen output expectations. In the United Arab Emirates, business sentiment sank to a record low, and the overall PMI swung from an 11-month high of 51.0 in September to a 2-month low of 49.5 in October.

The Philippine’s manufacturing PMI likewise dropped from a 57-month high of 50.1 in September to a 2-month low in October of 48.5. Covid restrictions loom there.

Today’s U.S. menu of data releases will include factory orders, motor vehicle sales, the New York regional PMI and the IBD/TIPP optimism index, but these reports will be overshadowed by the election returns. A verdict before midnight is not assured.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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