Thank God For The Technocrats

Equities seemed pretty sure-footed in the earliest trading this week, but separating signal from noise is a bit challenging.

The dollar was squarely on the back foot, providing a nice tailwind and perhaps a bit of relief for anyone worried that a continuation of last week’s rally in the greenback would cause indigestion for risk assets.

It’s month-end, and by now it seems like folks have decided that thanks to September’s woeful performance for equities, rebalancing will be a boon instead of an impediment. “The dismal performance of stocks for much of September suggested a risk of month-end rebalancing purchases into Wednesday’s month-end”, Bloomberg’s Cameron Crise wrote. “Why shouldn’t the mystery overnight buyer get in on the action, too?”

Read more: Stocks Have Cleared Two Of Three ‘Key Challenges,’ JPMorgan Says

One reason for not “getting in on the action” today, or at any point over the next month, is that the US is teetering precariously on the brink of something that feels like an authoritarian epoch. But the sheer gravity of that seems to be beyond the capacity of many market participants to grasp, let alone hedge.

For their part, ING thinks Tuesday’s debate could “eclipse” this week’s data calendar (e.g., September payrolls and ISM), and perhaps even steal some of the thunder from any progress made on another virus relief bill.

The debate, ING cautions, could “accelerate the risk-reduction trend” across markets, with summer reflation trades “most at risk”.

To be sure, there’s no shortage of consternation, and stretched positioning tied to that consternation may help explain some of the price action over the past several sessions. Bloomberg’s Crise points to a six standard deviation spec short in Nasdaq futs, for example.

“I have been shocked at how quickly the trading community has flipped from all-out-bullish to screaming-for-their-mother bearish”, former head of equity derivatives at RBC, Kevin Muir, said. “Look at the net spec position in the E-mini Nasdaq futures”.

Look at it, indeed. “Could all these new minted bears be correct? Sure. No doubt about it. Things certainly seem dire”, Kevin added, before noting that while he has “no real good reason to fade them, somehow I think they are going to be wrong”.

Fingers crossed. And I mean that sincerely. Because to the extent any bearish positioning is indicative of folks trying to position for the worst-case in November, it would be dire indeed if they turn out to be right.

Don’t let anyone delude you — a scenario where the president literally refuses to leave office after a conclusive outcome, leading to some manner of physical standoff, would be met with a commensurately adverse market reaction. And that assumes markets would be kept open at all under that “science fiction” script. The Fed would doubtlessly be forced to flood the market with liquidity and perhaps even provide actual guarantees on some assets.

Assuming the absolute worst doesn’t play out, various middling scenarios could still see equities trade lower out of the event. Even if there’s no “active” effort from the Fed in November (i.e., no additional stimulus is deployed ad hoc to guard against election-related instability), the current policy stance ($120 billion/month in QE and rates at the ZLB at least through 2023) effectively limits the downside for stocks in a situation where investors feel like they need to further price in a Democratic sweep.

“A decisive election outcome with resistance limited to the Twitter-sphere will clear the way for financial markets to price in the results”, BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill wrote Monday. “While one might anticipate a meaningful correction in the wake of the event, perhaps 10-15% off the peaks ahead of election day is all the concession the extremely accommodative monetary policy reality will allow”, they went on to say. “Unsatisfactory for those in the market anticipating another material leg lower in risk assets to be sure”.

Thank heavens for the technocrats in the Eccles Building.


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