Post Debate Stocks Rally; Kiwi Goes Negative?

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VP Debate uneventful
RBNZ hints at negative rates
Nikkei 0.96% Dax 0.78%
UST 10Y 0.775
Oil $40
Gold $1892/oz
BTCUSD $10612/oz.

Asia and the EU
EUR Current Account 16.7B

North America Open
USD Weekly Jobless 8:30

Stock index futures were higher by 70 basis points in the wake of the Vice Presidential debate as neither candidate landed a knockout blow and equity investors continued to bet on a Biden win and the prospect of a large stimulus.

The VP debate was marked by a much more civil tone but highlighted the sharp contrasts between the two parties in their policy approach. Mr. Pence’s smooth speaking style and calm demeanor proved to be a much more effective defense of Trump Administration policies than Mr. Trump’s efforts last Tuesday, but both candidates offered a competent portrait of leadership, and it’s doubtful that they changed many minds.

In a sign of just how much less contentious this event was than last Tuesday Presidential debate, the most talked-about post-debate point was a fly which inadvertently landed on Vice President’s head and remained there for well over a minute.

The market reaction suggests that Joe Biden’s lead remains in place and that investors continue to bet on a large stimulus package if he assumes office. At this point, equities are trading on momentum alone and are ignoring any fundamental headwinds that suggest that the largest part of the rebound is over and that aggregate demand is likely to flatten as we head into colder weather and cases of COVID continue to rise all across the industrialized world.

Meanwhile, in FX risk currencies were mildly bid with most of the majors up by 20 – 30 pips including even the kiwi which tumbled earlier in the session on news that RBNZ is considering negative rates. Reuters cited an unnamed RBNZ official who suggested that the central bank was actively working on negative rates and funding for lending program noting that they would rather “do too much than too little” to support the economy.

If the RBNZ does move into negative territory it would be the first Anglo-Saxon country to do so and may pave the way for the UK to consider the same. At this point, monetary policymakers are far more concerned with the risk of disinflation rather than inflation and appear to be far more willing to maintain accommodative stance for much longer than in the past. However, as we have seen with Japan the impact of negative rates without a contemporaneous massive fiscal spend and perhaps even some sort of a direct cash grant program is not effective so a central bank’s attempts to stimulate the economy by monetary policy alone will likely fall far short of the target.

Boris Schlossberg
Managing Director

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