With many balls up in the air in the final week before the presidential election, risk aversion—or at best, caution—is gripping markets, prompting traders to take refuge in an asset they’ve felt safe in since the summer: the dollar.
The White House and Capitol Hill confirmed Friday what the gold market had suspected for weeks—that there wasn’t going to be a COVID-19 stimulus deal before the Nov. 3 election. Yet, gold traders had played along as the talking heads in the Trump administration and Congress babbled for nearly a month about a possible relief agreement.
Dollar In Play As U.S. Presidency Up For Grabs
With that uncertainty over—but lots of others remaining including whether Joe Biden would indeed wrest the presidency from Donald Trump—macro traders were making a beeline for the dollar.
The Dollar Index, which pits the greenback against six major currencies, was up 0.2% at 92.94 by Monday’s lunch-hour in Asia for only its second positive session in seven days.
The strength of the dollar weighed on gold, pushing it below the key bullish point of $1,900 per ounce.
U.S. gold futures for December delivery hit a session low of $1,892.60, down 0.3%. But some were certain of a rebound later in the day—and possibly a late-week rally—on speculation over a Biden win and post-election talks of a COVID-19 stimulus.
Desmond Leong of AxiCorp said:
“The USD has benefited significantly from President Trump’s policy mix of aggressive fiscal stimulus at home and trade protectionism abroad. This could come to an end if a Democratic president is elected.”
“Indeed, if the Democrat nominee Joe Biden emerges victorious, we could expect more favourable bilateral trade agreements along with less aggressive protectionist policies, especially against NATO allies in Europe which could promote more USD weakness.”
And regardless who wins the election, analysts are also certain that a relief package needs to be executed as soon as possible.
Next Focus: Post-Election Stimulus
And that stimulus—free of election politics—could be huge. Focus is returning to the growing financial cost of the pandemic and what might be needed to start sending checks out again to unemployed Americans, keep small-and-medium businesses funded and thousands of airline and other workers on the payroll. No one has any idea what the number will be. But it wouldn’t be amiss to think it will be as much or more than the original $3 trillion disbursed in combined relief issued between March and April.
Adam Button, chief currency analyst at Forex Live, said in a Friday post:
”History shows that almost every government struggling with instability does the same thing: Spend money.”
While equities are likely to surge across the board once the stimulus is known, on the commodities front, the case for gold is particularly “overwhelming,” said Button.
“We're still in a seasonally weak spot but if there's some weakness in November, it will be time to buy,” Button added, referring to the yellow metal’s failure to cross the key $1,950 per ounce last month.
“If not, buy in December at any price. I mean, does this look like a top to anyone? It looks ready to explode.”
Traders will also be on the lookout for U.S. third quarter GDP data on Thursday to gauge recovery since the record 31.4% plunge in Q2. Forecasts are calling for an equally robust growth of 31.9% in June. If the figure disappoints, the dollar will almost surely tumble, pushing gold higher.
OPEC Uncertainty, COVID-19 Weigh On Oil Outlook
On the oil front, OPEC's mind games weighed on sentiment. In July, the group announced rollbacks in production cuts, before a steady deterioration in demand began. Neither Saudi Arabia, which dominates the group, nor Russia, which serves as its biggest ally, has made clear if the changes were off or merely postponed till the year end.
New York-traded West Texas Intermediate, the benchmark for U.S. crude, was down 71 cents, or 1.8% at $39.14 per barrel. Last week, WTI fell 2.5%.
London-traded brent, the global benchmark for crude, was off 69 cents, or 1.6%, to $41.38. Last week, Brent lost 2.7%.
Adding to the bleak outlook for oil, was the ramp up in U.S. infections of coronavirus at the weekend, with caseloads reaching a new daily record of more than 83,000. The outbreak also peaked in France, hitting more than 50,000 cases on Sunday.
And on the supply side Reuters reported that Libya's National Oil Corp ended its force majeure on exports from two key ports on Friday and said production would reach 1 million barrels per day (bpd) in four weeks, quicker than thought.
"The recent surge in COVID-19 cases and further movement restrictions across parts of Europe is weighing on sentiment, with concern over what this all means for demand," ING Economics said in a note. "Not helping, is the fact that Libya appears to be returning supply to the market quicker than expected.”
Disclaimer: Barani Krishnan does not have a position in the commodities or securities he writes about.