Markets return to normal, and traders may be loving it

Calendar comeback – currencies begin moving to the tune of economic indicators, a welcome return for traders. Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the latest market moves and what to expect in the final stretch of 2020 and beyond.

Joseph Trevisani: Equities are having a field day pricing the return and whatever happens between now and the spring, hopes are high that normal will return.   Albeit a normal with huge changes in work, home life, travel, and other areas. Those changes will provide a large boost to growth as companies form and expand to profit from the changes. For currencies, I expect a return to comparative economics.

Yohay Elam: On Monday, we have seen how Markit's US PMI, usually a second-tier release, had a substantial impact on the Dollar. Better-than-expected data, stronger Dollar. It is refreshing to see economic figures moving markets after politics took over. Do you think this return to comparative economics will continue?.

Joseph Trevisani: Yes. Markets need to trade and where else can we go? Central banks are on semi-permanent hold.

Valeria Bednarik: It will likely be a bumpy ride. I believe that we are moving in that direction, but there are still some other things to resolve in the way. As you said, Markit PMIs were an unexpected catalyst. Today we have Durable Goods, final GDP, employment, and the market's reaction fell short of interesting.

Yohay Elam: I think that today's figures offset each other. Upbeat durables, downbeat jobless claims.

Valeria Bednarik: True. Yet in general, pointed to a steady economic comeback.

Yohay Elam: The past two Nonfarm Payrolls reports were overshadowed by huge events, Trump's coronavirus, and the elections.

Joseph Trevisani: I think durables are more important. I expected some layoffs from the new series of state restrictions, though most analysts in the survey did not. But I don't think it accelerates.

Yohay Elam: Indeed, durables point to elevated investment, an excellent sign. While weekly jobless claims are yet to turn into a trend. Though this might change.

Joseph Trevisani: Exactly, especially business spending. Now these are October Numbers and the new restrictions are November events, still, with a vaccine on the near horizon, I don't see business pulling back on spending. There are so many changes in the economy.

Valeria Bednarik: At this point, and with the numbers we have, the US is outperforming its overseas counterparts. But if you take a look at charts, you wouldn't be able to affirm so. The dollar is down, as equities flirt with record highs. Treasury yields remain depressed. So, what would it take for the dollar to strengthen substantially?.

Yohay Elam: It looks like the risk-on/risk-off trade has had its impact on the Dollar. Optimism sending it down. The reaction to Markit's PMI may mark a turning point, but yeah, we might not be there yet to answer your question. Perhaps if the Fed responds to upbeat data and refrains from adding more QE, the dollar could strengthen.

Joseph Trevisani: Yields I think. The USD/JPY is part of the story.  Even with a -0.1% rate, deflation provides a yield advantage over US yields.

Yohay Elam: Deflation and inflation, also long forgotten economic indicators.

Joseph Trevisani: Yes, but operating nonetheless.

Yohay Elam: I have been reading some 2021 outlooks, and some suggest that inflation may surprise markets. Due to pandemic-driven lack of supply, lots of easy money. Do you guys buy that?

Joseph Trevisani: I have my doubts. The trend has been lower for a long and it is a global event. I think the supply issues such as they are will be transitory.

Valeria Bednarik: I do buy it. People will be eager to run away from restrictions and enter a shopping/holidays' spree. But I also think it could be short-lived.

Joseph Trevisani: I think that demand will shoot up once a vaccine becomes widespread. But I agree that any spike will likely be short-lived. Ephemeral enough to keep central banks on hold.

Valeria Bednarik: Exactly.

Joseph Trevisani: Demand has been pretty strong throughout.  Retail sales have an average of 0.89% monthly from March to October.

Yohay Elam: There will be more things to spend money on, at least here in Europe. Tourism is set for a comeback.

Joseph Trevisani: I'm not sure tourism will happen until the fall. But I agree. I canceled a trip to Venice. My kids want to go back. Italy, not California.

Yohay Elam: I had plans to go to Georgia, the country, not the state. So, inflation is unlikely to make a comeback as a market mover.

Joseph Trevisani: The global production pressure on pricing is not going away.

Yohay Elam: But I guess that core figures that feed into GDP, like retail sales, industrial output, and others may have an impact.

Valeria Bednarik: I have travel plans enough to fulfill a couple of years.

Yohay Elam: So you're the one going to push global inflation higher, Val.

Valeria Bednarik: I wish.

Joseph Trevisani: Maybe it's your children. Mine are planning holiday gifts.

Yohay Elam: Almost Thanksgiving. And afterward, we have a few final weeks of action in markets. Santa Rally?

Joseph Trevisani: My guess is that we are not going to have much of a market pause this year. Most of the banks close their books for the last two weeks of the year.

Valeria Bednarik: My guess is that we can't expect much. The pandemic fatigue has hit us all.

Joseph Trevisani: I have hopes and am eager to resume semi-normal life.

Yohay Elam: So more of an anti-climatic end to a turbulent year. I am optimistic. Hoping to see economic data and central banks moving markets. The Fed, BOE, and ECB will have their last word of the year before Christmas.

Joseph Trevisani:  It will be interesting to see how long it takes the Fed to back off from its 2023 no change prediction.

Valeria Bednarik: And we are expecting different attitudes from those central banks.. maybe we will have a Santa Rally after all.

Joseph Trevisani: I think the past eight months have been one already.

Yohay Elam: Gold has been one of the losers in recent weeks. Unwinding some of the 2020 rallies. Do you think it has room to shine toward year-end?

Valeria Bednarik: Maybe some sparks here and there, but no 2,000 before year-end.  Has just broken below the 38.2% retracement of this year's rally.

Joseph Trevisani: I agree. Its armageddon edge is probably gone.

Valeria Bednarik: Those sparks may come from Brexit tensions, or coronavirus outbreaks, or even central banks' announcements, but I think those are meant to be short-lived.

Yohay Elam: Sure. Circling back to where we started.

Joseph Trevisani: Yes, Brexit will get done, especially now.

Yohay Elam: Do you think next week's NFP will return to its past glory?

Valeria Bednarik: I doubt it. NFP only returns to glory when we have unexpected results, one way or the other. And with a divergence from expectations.

Joseph Trevisani: No. There is a great deal of competition for economic news attention.

Yohay Elam: Yep. At least with Brexit, Deal or no deal, it will be over, another light at the end of the tunnel alrighty, I think we have enough some final words?

Joseph Trevisani: The interesting economic question is how deep are the changes we suspect the pandemic have wrought? If they are permanent, as I think they are, then the business oppourtunites are great, and the result will be sustained economic growth for several quarters.

Yohay Elam: Indeed, an acceleration in digitization + vast fiscal and monetary stimulus = string growth. Economies unshackled from low productivity and austerity.