Lots of noise, not much substance

The overnight session in New York was a noisy one, equities seesawing back and forth before closing slightly higher, a figure that belied the intra-day volatility. US Initial and Continuing Claims data disappointed, with concerns rising that the US recovery could be running out of steam. However,US data was very positive and was enough to turn the herd away from the cliff edge and back to the relative safety of plains.

As the dust settled, Asia finds most asset classes pretty much where they were yesterday, with very little directional information to sink its teeth into. The tail-chasing nature of the New York session suggests that sentiment remains fragile with the FOMO crowd undecided at these levels, but probably more nervous about negative headlines and hanging out close to the exit doors.

We can expect more of the same today, with the Asian and European data calendars sparse ahead of US Durable Goods this evening. Things get rather more exciting next week with the end of the month. China releases Industrial Profits over the weekend, which is expected to be down 4.70% YoY, but showing a continued recovery. A surprise either way could set up Monday to be a busy one.

Elsewhere the calendar is packed with official and Caixin PMI’s from China on Wednesday along with US GDP. Japan’s Tankan survey is released on Thursday with US Personal Income Data. Friday culminates with US Non-Farm payrolls data. On the flip side, China heads on holiday for a week from Thursday, October 1st. Several other countries in the region will also head for Mid-Autumn breaks, notably South Korea. The net effect is likely to be a muting of activity in Asia in the second half of next week just as the week’s data calendar hits its peak.

Of course, a week seems like a year in these markets at the moment, with plenty of volatility to come between now and then. In the US, the Democrats are apparently finalising a $2.50 trillion fiscal package to put before the Republicans. A headline number like that is sure to be dead on arrival with them. The jobless claims data overnight may be the first real indication that the effects of the previous package are running out of steam. With a US election just over a month away, and a potentially noisy Supreme Court appointment ahead of it, the chances of both sides reaching an acceptable fiscal compromise recede by the day.

A surge in Covid-19 cases in Europe notably, and the US, continues to threaten an increase in renewed movement restrictions. This scenario has always been one of my global recovery banana skins and the risks to appear to be rising. Although I still expect a vaccine to appear in Q4, because I’m not all doom and gloom, there is a belated realisation, that its efficacy will be uncertain. A cold reality is that the US and Europe, will not magically be able to vaccinate entire populations overnight.

That is certainly quite a list of risk factors financial markets are having to belatedly adjust to after six months of uncontained euphoria. The packed data calendar next week, and a weekend of potential political developments, may change that picture. But in the short-term, I suspect the correction in equities and the US dollar still have more room to run. By the end of next week, we should know if the travails of this week are what pundits label a “healthy correction.” Or whether the mother of all reversions to the mean is finally upon financial markets.