Marius Paun | London, UK | Senior dealer | Friday 16th October 2020
Markets Jittery Amid Lack Of US Stimulus And A Rise In Covid-19 Infections
On Monday major US indices rose for the 4th consecutive day with Nasdaq having its best day since September 9th. Thus S&P and Nasdaq came within reaching distance (less than 2%) of their respective all-time high records. Among the drivers was the feel-good factor in the run-up to Apple releasing their new iPhone 12 on October 13 which is 5G enabled. The tech giant posted a 6.26% gain for the session.
The gains quickly evaporated the next day after Treasury Secretary Steven Mnuchin said that a deal between Republicans and Democrats would be difficult to reach before elections. With less than three weeks until the US presidential elections, investors seemed to find little reason to take on extra risk. On Friday, the US retail sales increased rather strongly in September. Spending rose 1.9% for the fifth month in a row after consumers splashed on sporting goods, home improvement stores and even vehicles, despite working from home a lot more.
China released its trade balance for January to September showing a $2.3 trillion surplus. Exports for the third quarter increased by 10.2% vs 10% expected while imports grew 4.3%. Among the biggest import risers are soybeans, iron ore and crude oil. For all that rhetoric, trade with the US increased 2% to September. The Customs authorities reported ‘the international landscape became increasingly grim and complicated with instability on the rise’.
We also had Chinese inflation data for last month. CPI rose 1.7% year on year vs 1.9% expected down from 2.4%. PPI moved down 2.1% more than 1.8% decrease anticipated. The report states the negative PPI is forecast to weigh on business profitability.
In the UK Prime Minister Boris Johnson spoke with German Chancellor Angela Merkel last weekend saying there are ‘significant gaps’ in the Brexit talks with European Union which need to be bridged in the coming days. Apparently, the UK government could be ready to hold talks beyond ‘the deadline’ of Oct 15th, the date of the EU Summit. In reaction, the sterling rose.
On another note, Bank of England asked banks about their readiness, in particular the technological capabilities, to implement negative interest rates if the time comes. So much for denying it recently… The central bank added that the UK economy at the end of the third quarter was about 9-10% lower than at the end of last year.
Financial Times reported that the European Union has now a target ‘hit list’ of up to 20 large tech firms for which they would like to introduce tougher regulation to address their market dominance. Also, ECB President Lagarde said this week they are seriously looking at a digital euro going forward which will not be a substitute for cash but rather a supplement.
US Crude oil slumped below $40 per barrel briefly after reports that Libyan supply is expected to pick up. Gold continued to retrace this week from a high of $1931.8 but found support around $1886 mark. Going into the weekend the precious metal was trading around $1900.00 level.
Marius Paun | London, UK | Senior dealer | Thursday, 15th October 2020
Nasdaq sold off for a second consecutive session with more losses potentially underway. There are less than three weeks until the US presidential elections and the risk-off sentiment seems to be omnipresent. This week started encouragingly for Nasdaq as the tech sector was driven higher by expectations regarding Apple’s release of its coveted 5G iPhone 12 model. However, the ongoing uncertainty convinced investors there’s little reason to add to their existing portfolios.
The gains quickly evaporated after Treasury Secretary Steven Mnuchin said that a deal between Republicans and Democrats would be difficult to reach before elections. On top of that, mixed quarterly earnings reports, especially from the banking sector where investment banks (JP Morgan and Goldman Sachs) have done rather well as opposed to commercial banks (Wells Fargo) also put pressure on stocks. Last but not least drug company Johnson & Johnson announced that it has halted trials of its experimental Covid-19 vaccine amid a spike in global infections.
Lately, we had a string of conflicting reports about progress followed the next day by the disagreements on the US fiscal front, adding to the overall uncertainty. An increasing number of analysts started to think that the odds of something being done before November 3rd are dwindling. From that point of view, Nasdaq recovering almost all of the losses following the early September sell-off shows the tech sector is still in demand.
There has been growing speculation in the media about the prospects of tighter regulatory oversight on tech leaders like Amazon, Google, Facebook, Apple which have grown enormously and are ‘threatening’ the economy. As we mentioned before they are responsible for the bulk of stock market gains this year so the possibility of the regulators forcing them to break up/ renounce their ‘monopoly position’ could seriously weigh on investors optimism.
The non-farm payrolls data released earlier this month showed the US gained 661,000 jobs in September less than the 850,000 expected. So the report was not very good for the stock market and furthermore, the rise in initial claims signals the labour market could be starting to wobble.
We also saw the presidential debate the other week between incumbent president Donald Trump and challenger Joe Biden. To say it was a disappointment would be an understatement. Trump refused to say if he would accept the results of the election, opening the door to a constitutional crisis. On the other hand, Biden refused to play down speculation that Democrats might try to increase the number of Supreme Court members. Those issues would only add to the current uncertainty in the markets.
The pessimism could be worsened by the surge in Covid-19 cases around the world, with leading European countries like France, Germany, Spain and the UK having imposed strict local lockdown recently. Both US and non-US companies are listed on the Nasdaq so what happens outside the US matters for the index as well.
Going forward, investors will undoubtedly keep an eye on the fifth stimulus package negotiations, updates on the virus infections/ casualties as well as vaccine trials developments. Economic data releases, especially relating to jobs market, and downbeat US inflation will also provide further clues as to whether sentiment could improve.
Nasdaq recovered most of the early September significant sell off after finding support at the 50% Fibonacci retracement at 10680. The short-term moving averages moved back above the longer-term ones and both pointing upwards. But the market price has just crossed below the short-term MA once more.
On the upside, buyers will be looking for a close above 11975, today’s opening. A close above resistance at 12185 will confirm that current comeback still has legs and might even retest the all-time high of 12468 reached on September 02nd. On the downside, bears will need to break below support just under 11745 first. A breach below could open the door for testing support at 11568 which coincides with 23.6% Fibonacci retracement.