Research

Marius Paun | London, UK | Senior dealer | Thursday, 05^th November 2020

 

Following almost two days of tense vote-counting, the US is yet to declare a winner for its Presidential election. Despite that, for the third day in a row, stocks have rallied.

Nasdaq 100 soared more than 4% yesterday with Dow Jones and S&P 500 also posting strong gains. The consensus is that investors are getting increasingly comfortable moving back into risky assets even with unfinished business regarding the election results. It appears Republicans might keep control of the Senate, so the Congress could remain divided between the two parties. Consequently, this will reduce the chances for a so-called ‘blue wave’ proposal to be signed into laws, independent of who’s going to be in the White House.

More specifically the threat of repealing Donal Trump’s tax cuts has been reduced. The tech giants like Apple, Amazon, Google, Facebook and Microsoft must have heaved a sigh of relief and could see ongoing strength as the prospect of increased regulations eased somewhat. Furthermore, the massive stimulus and infrastructure program promised by challenger Joe Biden could take a hit if the Republicans are still the majority in the Senate.

Before the elections, there were several polls that predicted Joe Biden will win with more than 10% advance on a national level, a ‘blue wave’ sweep with Democrats having a good chance of getting everything. It turned out it wasn’t a landslide with the big surprise being how well Trump has done, even if he loses. At the time of writing, Joe Biden has 264 votes of the 270 needed to declare victory, compared with Donald Trump at 214. Biden claimed Wisconsin and Michigan on a rather thin advantage, which seems to be the case for the rest of the swing states. Trump has already asked for recounts in Pennsylvania and Michigan on alleged fraud although he has not provided evidence. So a string of lawsuits are likely, which could prolong the uncertainty.

Nonetheless, investors seem optimistic so far that despite the winner of the Presidential election is still too close to call in the swing states, the status quo in the Congress is likely to remain in place for the next year. In turn, any tax increases or any disruptive policy changes that could negatively affect businesses are now less likely. It’s true that eventually a winner will be called but if history is any guidance, stocks tend to do well in the year post Presidential election regardless of which party gave the incumbent.

On Friday, all eyes will be on the non-farm payrolls report with the expectations for another 600,000 jobs created last month (an extra 650,000 jobs form the private sector and a loss of 50,000 from the public).

The downside in all this saga is that the fiscal stimulus might not arrive as quickly as the markets hoped before the election. Regardless of the winner, legal challenges are almost certain to follow given the very slim margins in a number of states. Civil unrest is also a distinct possibility and the particularities of voting systems for individual states could delay the overall result, possibly for weeks, some even say months. It’s definitely the worst-case scenario everyone was hoping to avoid, reminiscent of the Bush vs Gore battle in 2000.

Markets were hoping for a fiscal stimulus sooner rather than later. It’s not that it will not happen but the timing could become a problem. With no one party clearly in charge, a compromise needs to be reached in order for the stimulus to get through the US Congress. The Financial Times already reported ‘with a Republican Senate there will be a sort of economic status quo, dominated by monetary policy or a Biden versus Mitch McConnel (Republican leader in the Senate) clash with fiscal policy becoming even more frugal’.

The Fed Chair Jerome Powell may be left propping the markets yet again in the absence of fiscal policy doing its bit. He already said there’s help if needed from his side even if he encouraged more spending from the government to complement that. Where it might become interesting is if the Fed would start to contemplate negative interest rates as the European counterparts?

 

Once again Nasdaq recovered after the selloff seen in the last two weeks of October from a high of 12,257 after finding support at the 50% Fibonacci retracement at 10,920. The price has crossed back above the moving averages with both indicators now pointing upwards again.

The recovery was even steeper than the initial drop with most of the gains seen in the last three sessions. Bulls have retaken control and will look for a close above resistance turned support at 11,750 which has been surpassed earlier today. If that level holds, more buyers could get confident the rally has legs and push for 12,185 and ultimately retest the all-time high of 12,468 reached on September 02^nd. On the downside, bears will need a close below support just under 11,800. That could open the door for testing support at 11,700.

Marius Paun | London, UK | Senior dealer | Friday 30^th October 2020

Stocks Dive On Covid And US Election Uncertainty

The US stocks posted sharp declines this week, driven by a resurgence in coronavirus cases, uncertainty surrounding the US election and the failure to agree on the next stimulus bill. On Thursday, the US Bureau of Economic Analysis showed the GDP in the third quarter grew by a record 33.1% on a year on year basis. The data beat the official consensus for a 30.9% growth rate.

The initial jobless claims also came in better than anticipated at 751,000 vs views for 758,000 (down 40,000). Nonetheless, the rebound was short-lived and stocks resumed their downtrend as investors now weigh in a delay in election result not only because of the additional time needed to count mail-in ballot but also the disputes ( President Trump already tweeted he intends to contest it).

Over the weekend China’s Global times reported the People’s Bank has started to back the issuance of digital yuan. Apparently, the legal basis has been provided and a trial has already commenced in parts of China!!! Meanwhile, industrial profits for September rose 10.1% year on year. It was a strong comeback but less than August (+19% compared with last year).

We also saw Germany’s central bank said the economic recovery is continuing but at a much slower pace. It added that an abrupt increase in Covid infections, coupled with restrictions, will hit the services industry quite hard. Hospitality is estimated to be badly hit in the near future. Speaking of restrictions, mid-week Germany decided to close parts of the economy, bars, restaurants and leisure facilities. The shutdown will start on November 2^nd until the end of the month. In the process, the government will provide up to 10 billion euros for the lockdown sectors.

The French government was even more restrictive in its response to high levels of reported coronavirus cases lately. Universities will go online; bar, restaurants and non-essential retailers to close; moving between regions banned; external borders to be shut. The measures start today and will last until December 1^st at the earliest.

The European Central Bank had its meeting this week and decided to hold rates unchanged as widely expected. President Christine Lagarde said the risk is clearly tilted to the downside, the tools ‘will recalibrate’ based on December estimates. Worryingly she also admitted the economic recovery is ‘losing momentum faster than anticipated’.

Back in the UK, there is growing speculation in the media of mounting pressure on Prime Minister, Boris Johnson, to join his European counterparts and consider a second national lockdown. The UK Government has refused that so far, saying a 3-tiered approach with local lockdowns is a better solution. We also learned that Johnson might just wait for US election result before making a final decision on Brexit. A no-deal is much more likely in the event of a Trump win. If challenger Joe Biden wins things could get a bit more complicated.

Gold prices followed equities lower this week dropping from $1911 to $1880 going into the weekend as investors preferred the safety of the US dollar in the current uncertain environment. Concerns about the global slowdown and increased supply also hurt oil prices. The US crude slumped from a high of $39.9 to $35.07 trading around $35.45 on Friday afternoon.