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TalkTalk bid, IMB up on smoking, S&P 500 breaks range
The yo-yo week on Wall Street continues with stocks bouncing after Donald Trump tweeted support for a range of fiscal stimulus measures, having earlier set the market down by calling off talks on a comprehensive package until after the election. Whether it’s now or after November, what’s been made clear to investors is that fiscal stimulus is on its way.
The timing becomes less important – doubts would resurface if there is a contested election result that leaves Washington lawmakers unable to come to a deal. However, Joe Biden’s lead in the polls would suggest this is becoming less likely, albeit my inclination is that Trump will do a lot better than the polls indicate.
Europe opens higher, can Wall Street gain for a second day?
The S&P 500 rose to its highest level since the start of September, finishing up 1.74% at 3,419, with the Sep 4th closing high at 3,426 offering the daily resistance. All 11 sectors rose. The Dow climbed 530 points, or 1.9%, to notch its best day since July. The Nasdaq added 1.9%.
The question is whether market can put two straight days of gains together, something it’s not managed in a week. The range-bound nature of the market right now and the general uncertainty around stimulus and the election – not to mention the Q3 earnings season about to kick off – may make it tough to cement gains.
Nevertheless, futures point to further gains when the cash equities open later. European markets opened higher in early trade on Thursday.
Fed minutes showed that officials are divided over the application of the central bank’s new policy framework. Policymakers ‘discussed a range of issues associated with providing greater clarity about the likely path of the federal funds rate in the years ahead’.
Meanwhile a report from Fed economist Michael Kiley called for the central bank to juice bond holdings by another $3.5tn to support the economy. The market probably liked this idea, too. Participants agreed on the uncertainty facing the economy, albeit there are the likes of Bullard who think it’s all going to be fine by the end of the year.
Weekly unemployment claims data later today will be watched as closely as ever.
German exports rose more than expected in August, climbing by 2.4% vs expectations for 1.7%. However, this was down from the 4.7% recorded in July. Exports to the US were down 21%, whilst China imported only 1.1% less goods than last year.
Toscafund offer boosts TalkTalk shares
TalkTalk shares shot higher after it received an offer Toscafund Asset Management for 97p a share. TALK rallied over 16% to exactly 97p. Executive chairman Charles Dunstone needs to approve the takeover for it pass. With no discount and no premium in the price this morning, the market seems to think he is.
There were signs of something afoot in the summer – Dunstone purchased 1m additional shares at the end of June at 86p after Tosca raised its stake to 29%.
TalkTalk had somewhat gone off my radar of late so I must revert to a two-year old note from 2018: “Increasingly TalkTalk looks like it’s ripe for takeover. It provides a good entry point into the UK broadband market and with growing subscriber numbers, there is plenty to recommend it.
Indeed, with a strong subscriber base, improving margins and shares still at multi-year lows, for anyone looking for an entry point into the UK broadband market then it’s probably your best bet.” Recently it’s enjoyed decent cash growth on better fibre rates and cost control.
Imperial Brands rises alongside smoking demand
Smoking kills: Imperial Brands is seeing increased demand for its products as a result of the pandemic. And it’s good old fashioned cigarettes and tobacco we’re talking here – ‘next generation products’ like vaping are down 30%. Another unwanted side effect of governments’ inept, disruptive and failing approach to dealing with the coronavirus.
It’s been about fighting Covid at all costs and the UK government for one has systematically failed to consider the wider public health implications of their response. For example, Matt Hancock recently admitted that cancer patients would only be treated if the virus was ‘under control’.
Management today noted: “We have experienced some COVID-related changes in consumer behaviour with increased overall demand against our expectations, as consumers appear to have allocated more of their spend to tobacco, as well as some demand shifts between different markets and channels. This has resulted in better than expected volumes, driven by improved volume trends in several key European markets and in the US.”
Group revenues are slightly ahead of the half-year guidance, but additional manufacturing costs as a result of Covid have been incurred. Constant currency earnings per share are down about 6%, in line with expectations.
EasyJet on track for first-ever annual loss
Meanwhile, EasyJet reports today it’s on course for its first-ever annual loss as a result of the pandemic restrictions on air travel that have crippled the industry. Management expects to report a group headline loss before tax in the range of £815m to £845m after flying 50% fewer passengers than last year.
The airline flew 38% of planned capacity in Q4, in line with the September update in which it said capacity would be slightly less than 40%. These sorts of losses were anticipated and, overall, I think investors only really care about liquidity and headroom to get out the other side of this. On that front easyJet had a cash position of £2.3bn as of the end of September and it’s lowering costs aggressively to reduce the cash burn wherever it can – Q4 cash burn was less than Q3, which is a positive. Capacity of Q1 2021 will be at 25%.
With winter coming it’s usually a lean time for airlines and it’s going to be a long period of uncertainty as we await to see whether next summer is strong enough to prevent further cash being required. But easyJet looks ok for now.
Plans for a testing system for arrivals into the UK to reduce the quarantine period would be a boost, but there many factors that will weigh on demand, from unemployment to fears about the virus itself.
Week Ahead: Pence vs Harris in focus after messy presidential debate
Vice president Mike Pence and senator Kamala Harris will both be hoping to emerge from this week’s vice presidential debate with more dignity than the presidential candidates did last week. It shouldn’t be hard. Also ahead, there’s plenty from central banks this week, including a rate decision from the RBA and minutes from the latest FOMC and ECB meetings.
US election: More decorum from Pence and Harris in vice presidential debate?
This week sees the second of the US election debates, this time the one and only face-off between vice president Mike Pence and senator Kamala Harris.
The first presidential debate last week seems to have little impact on the polls, and is viewed as being such an embarrassment that the Commission on Presidential Debates has announced it will make changes to the format of future events in an attempt to make things more orderly.
One of the changes being considered is to cut candidate’s microphones if they try to interrupt excessively. Although this will impact Trump more than Biden, this might not necessarily disadvantage the President, who didn’t give his opponent much opportunity to slip up last time.
The vice presidential debate gets going at 21.00 ET, October 7th (01.00 UTC, October 8th). The last time Pence appeared in a nationally televised debate was in October 2016. Harris, on the other hand, has had plenty of practice in recent months.
FOMC and ECB meeting minutes
Sandwiching the vice-presidential debate this week are the Federal Open Market Committee minutes and the European Central Bank accounts.
The FOMC took the opportunity last month to flesh out its new average inflation targeting strategy, although according to its predictions it’ll be a long time before policymakers are in a position to let inflation run hot. The latest minutes might provide some more clarity, but with the debate following a couple of hours later, markets might not take much notice.
ECB president Christine Lagarde noted after the latest meeting of the Governing Council that the EURUSD exchange rate had risen notably, although she also stated that “as you know, we don’t target the exchange rate”. The minutes could give more information on how policymakers fear a strong euro might impact their mandate.
Although EURUSD has retreated after peaking above 1.20 at the start of September, the pairing is trending around the same levels as were seen when the ECB were considering its strength.
Reserve Bank of Australia interest rate decision
Futures markets are firmly betting that the Reserve Bank of Australia will cut rates to 0% when it meets this week. ASX 30 Day Interbank Cash Rate Futures show a 64% chance of a cut at the time of writing.
This comes after recent comments from deputy governor Guy Debelle, who used a speech to outline policy tools the RBA is considering to help it meet its twin mandates on employment and inflation.
Foreign exchange intervention and negative interest rates were both on the list.
Economic data to watch
In terms of economic data, we’ll be watching the US ISM nonmanufacturing PMI and weekly jobless claims, German industrial production and a slew of data from the UK on Friday, including monthly GDP, industrial production and construction output figures.
Highlights on XRay this Week
Read the full schedule of financial market analysis and training.
|17.00 UTC||05-Oct||Blonde Markets|
|From 15.30 UTC||06-Oct||Weekly Gold, Silver, and Oil Forecasts|
|17.00 UTC||07-Oct||Webinar: 10 Trading Rules for Every Level of Trader|
|17.00 UTC||08-Oct||Election2020 Weekly|
|12.00 UTC||09-Oct||Platform Walkthrough|
Key Events this Week
Watch out for the biggest events on the economic calendar this week. A full economic and corporate events calendar is available in the platform.
|07.15 – 08.30 UTC||05-Oct||Finalised Eurozone, UK Services PMIs|
|14.00 UTC||05-Oct||US ISM Nonmanufacturing PMI|
|03.30 UTC||06-Oct||RBA Interest Rate Decision|
|Pre-Market||06-Oct||Paychex – Q1 2021|
|After-Market||06-Oct||Levi’s – Q3 2020|
|06.00 UTC||07-Oct||German Industrial Production|
|07-Oct||Tesco – Interim Announcement 20/21|
|14.30 UTC||07-Oct||US EIA Crude Oil Inventories|
|18.00 UTC||07-Oct||FOMC Meeting Minutes|
|01.00 UTC||08-Oct||US Vice President Nominee Debate|
|11.30 UTC||08-Oct||ECB Monetary Policy Meeting Accounts|
|12.30 UTC||08-Oct||US Weekly Jobless Claims|
|14.30 UTC||08-Oct||US EIA Natural Gas Storage|
|06.00 UTC||09-Oct||UK Monthly GDP, Production, Output|
Stocks sink as Trump tests positive for Covid-19
President Trump and First Lady Melania have tested positive for Covid-19. How has the market reacted, and what does this mean for the US Presidential Election?
Stay on top of the polls and all the latest election news with our dedicated US Presidential Election site.
US Presidential debate farce, Compass points way to more lockdown worries
Staying up for the first Presidential debate would hardly have been worth it. Unedifying is the best word to describe. Biden held his own and the president missed his chance, mainly by talking over his rival at any opportunity; he did not allow Biden enough rope to hang himself.
Race featured prominently, but Trump only played to his base. This was the disruptive, abrasive Twitter Trump. We await to see whether the spectacle has had any impact on the up to one in ten voters yet to make up their minds. As grandpa Wilson would have said, I hae ma doots.
And as I keep saying, what matters in the US Presidential Election will be turnout in key battleground states and for this Trump needs it to be as rancorous as possible to energise his base. There is talk Biden won’t want to do more debates – that would be a mistake and make him look worse than he does after a relatively successful outing for the Democrat nominee, given the low expectations.
Equities down – will rebalancing give Wall Street a lift?
Stock markets fell yesterday, with European bourses down but off the lows. The FTSE 100 ended under 5,900. The S&P 500 butted its head against the 50-day moving average and came off to finish at 3,335.
US futures indicated further losses for Wall Street after the debate concluded. Asian markets were mixed. European stocks were mixed at the open but turned green after a weak start and the FTSE 100 rose above 5,900 with a weaker pound helping.
Month- and quarter-end rebalancing flows may make for volatility today. With US stock markets enduring a tough month there could be some reallocation back into equities that lifts Wall Street later.
Treasury yields ticked lower with bonds finding some bid, with the 10-year benchmark yield to 0.64%, its weakest since the start of September. I think last night gave the market a taste of the kind of election jitters to expect – the only thing the market wants is to get this election out of the way and draw a line under the whole charade.
Having kicked on from the 100-day line, gold firmed as TIPS moved more into negative territory but failed to clear $1,900.
Dollar slips lower, ADP in focus ahead of Friday’s NFP
The response in FX to the debate was a bit ‘meh’, but the dollar continued to ease back off the highs struck late last week and early this week, with DXY moving under 94, with bears eyeing the support at 93.70.
Later today is the ADP nonfarm report, which comes two days before the final NFP report ahead of the election. GBPUSD declined in early trade to test the 1.28 round number but the pair remains very much in its range of 1.27-30 that has bounded the price action for the last 3 weeks.
Britain’s economy contracted the most on record in the second quarter, albeit the 19.8% drop in GDP was less than the previously estimated 20.4%. Whilst this is backwards looking, just how optimistic can we be about the near future?
Compass Group uncertain about the future
Rising cases here threaten to mean further restrictions on our liberty that will act to further depress economic activity and consumer sentiment. Meanwhile unemployment will undoubtedly rise, harming the consumer sector even further.
Compass Group’s pre-close update contained some worrying signals for investors about this very problem, with management warning that the pace at which revenues and margins will recover remains unclear, especially given the possible increase in lockdown measures in the Northern Hemisphere through the winter months.
Group revenues fell about 19%, with Europe –25%, North America –19% and the Rest of World –9%. Sports and Leisure businesses in Europe and North America remain closed, but there has good recovery in Education and Healthcare. Shares fell 4%.
Lockdowns and expected disruption to arrangements mean airline shareholders need to keep a close eye on forward booking trends. Flight searchers are down anything from 60-80% from a year before, according to Kayak. The chart below shows demand for the UK over the course of the year. The figures for the rest of Europe are comparable.
Talk of negative interest rates has been doing the rounds a lot on Threadneedle Street of late. But the Bank of England would be well advised to consider a Federal Reserve study that says the European Central Bank (ECB) made a big error when it opted for negative rates.
As repeatedly stressed in these columns, negative rates represent a monetary policy black hole from which it is very hard to escape and it harms banks, eroding their profits and capital ratios over time.
The study from the San Francisco Fed notes that “banks expand lending only temporarily under negative rates” and “as negative rates persist, they drag on bank profitability even more”.
It concludes: “While lending initially increases under negative rates, our analysis implies that gains are more than reversed as negative rates persist. Overall, our results suggest that caution is warranted when considering negative monetary policy rates to encourage additional bank lending. Under extended negative rate episodes, evidence shows that both bank profitability and bank lending activity decline. This calls into question one of the primary motivations for negative policy rates.”
Chart: Negative rates are meant to increase loan growth, not depress it
Elsewhere in commodities, oil was softer as the API weekly inventory data showed a small draw on crude stocks while there was a build in gasoline inventories. As noted yesterday, traders should be wary of global onshore inventories flipping from draws to builds
The American Petroleum Institute recorded a draw of 831k on oil inventories whilst gasoline inventories rose 1.6m vs expectations for a draw of 1.3m. Oil stocks at Cushing, Oklahoma rose by 1.61m. As data points to a slowdown in the velocity of people, demand for oil is already rolling over and stocks may well start to build without China hoovering up the excess.
EIA data on tap later today will provide further guidance for markets. WTI (Nov) retreated to a two-week low at $38.42 but recovered $39, which is forming the near-term support. September lows at $36 are in focus.
Equity markets hungover ahead of Presidential debate + Brexit breakthrough?
There is the whiff of a hangover for investors this morning as European shares stumbled after an exuberant rally in the previous session that left the major bourses around 2-3% higher to start the week. We haven’t made it back to the key mid-Sep levels and bulls may be looking at downside risks in the shape of the slowing economic recovery and pre-election jitters.
Nancy Pelosi and Steve Mnuchin may be able to cut one last stimulus deal before the election, but it still looks like the odds of it passing the House and Senate are less than evens.
First presidential debate in focus
It’s all going to kick off later tonight, as the first US presidential debate takes place in Cleveland. The fun starts at 9pm US eastern time and will last one and a half hours. Trump won in Ohio, a typical battleground rust belt state, by eight points last time around but it is leaning towards Biden in 2020, according to the polls.
But we know polls only tell a portion of the story – it’s in the battlegrounds where it counts.
JPM did an investor survey of potential election outcomes – 79% said the worst-case scenario is a Democrat president and Senate, whilst 49% said the best case would be a Republican president and Senate.
We know which way Wall Street is leaning, but there is not a clear sense that the result will materially impact the course of equity markets. As discussed last week, whilst a Democrat clean sweep – the Blue-nami – would mean higher taxes and regulation, other factors may play into the bulls’ favour, notably the chance of a comprehensive fiscal package.
More importantly, the global recovery from the pandemic, the Fed and earnings will be key drivers for equities after the election. The only thing the market wants is to get the election out of the way – the real danger to near-term valuations would be a long period of legal disputes post-election, which may mean price action continues to chop sideways within the range set in the second half of September.
Vix futures are starting to look interesting again with the spread from Oct to Nov widening to $2 with the near month trading at $31 and November at $33, with December at $31.
Sterling up on hopes of breakthrough in Brexit talks
Brexit breakthrough? Hopes of a deal are on the up, amid reports that the EU is prepared to ditch its requirement to reach a broad agreement before drafting a text. This means they can start on the joint legal text whilst there are still a few outstanding issues that need to be resolved.
This has positive overtones, but the two sides still appear no closer on these critical last steps. European Commission Vice President Maros Sefcovic said yesterday: “The UK’s positions are far apart from what the EU can accept.”
Sterling drove to a two-week high, with GBPUSD rising to 1.29 before paring gains to sit around 1.2850 this morning.
Bank of England deputy governor warns over negative rates
But it the rally was less about Brexit than it was about comments from Dave Ramsden, the deputy governor of the Bank of England, who sounded a strong sound of caution over negative interest rates. The MPC seems to be airing its dirty laundry in public – the comments came only a day after Silvana Tenreyro pointedly backed negative rates.
Anyways it looks there is some clear ideological disputes among rate setters that needs to be worked out over the autumn, implying as Andrew Bailey suggested last week that negative rates are not likely on the near horizon, albeit they are being considered actively.
The problem for the Bank would be an unemployment crisis into Christmas that could put pressure on the MPC to act.
The dollar peeled off its recent two-month highs in the 94.60 region which is offering the near-term resistance. The pullback called for last week has been slow to emerge with a couple of retests of this level but near-term weakness is certainly becoming more evident.
Elsewhere, oil markets remain trapped in a tight range but could be heading for a pullback as global inventories start to build. API numbers later today, EIA numbers on tap Wednesday. Watch the Chinese numbers too as global inventories swing to builds.
Surging cases numbers cripple demand, whether rational or not. Contango spreads indicate softer demand and inventory builds ahead. The price action alone on WTI is a not a pretty picture for bulls.
Coming up, there is a slew of Fed speakers later today with Clarida, Quarles, Harker and Williams on the slate. Richard Clarida is probably the most important, with the Fed governor due to speak on Future Considerations for Treasury Market Resilience. Meanwhile, the Treasury market is completely dead as yields remain trapped in their tight ranges.
Chart: The S&P 500 is still trapped by the moving averages
The market rallied 1.6% on Monday and ran slap into the 50-day SMA, shy of the 21-day SMA. We have to see whether this marks the swing high and calls for another pullback.
Risk appetite resurfaces, HSBC shares soar
Risk appetite has returned after last week’s turbulence. European bourses rose 1-2% in early trade on Monday after Wall Street’s rally on Friday lifted the boats. The S&P 500 was still down for the week, but with the broad market -10% from its all-time highs at the low, those looking for a correction after the hot summer rally may have found it already.
The market tested 3200, which is where it reached at the peak in June before the pullback and where it closed 2019. Bonds have not taken part in the drawdown – US 10-year Treasuries have barely budged this month and remain stuck around 0.66%. This might imply that the September sell-off is more about a repricing of risk assets based on valuations and profit-taking after the summer run-up, rather than deeper fears about a prolonged stagnation in the economy.
Volatility likely on US presidential debate, NFP this week
Nevertheless, with the first US presidential debate and the last jobs report before the election coming this week, there is ample scope for markets to remain volatile. Until we clear the highs from a fortnight ago – 3400 on SPX, around 3300 on Stoxx 50 and 6,000 on the FTSE, the downside bias remains.
Rising numbers of coronavirus cases imply a softer recovery, depressed consumer sentiment and the need for more fiscal support to generate upside. Markets don’t seem to be moving too much on vaccine news and rumours – there may be a realisation that a vaccine is not a silver bullet that will repair all the damage done in 2020, even if it makes 2021 look brighter.
Ping An adds to HSBC stake
HSBC shares rallied 10% after Ping An Asset Management increased its stake in the bank. HSBC’s largest shareholder only marginally bolstered its holding to 8% from 7.95%, but the vote of confidence translated into a very substantial rally for the shares both in Hong Kong and London.
HSBC had lately sunk to a 25-year low after being named in reports relating to money laundering, so maybe this was some simple averaging-in by Ping An. Shares are only back to where they were a fortnight ago – when stocks have been beaten down as much as HSBC they are often ripe for larger percentage swings as investors try to figure out what is the real value.
If you think Britain’s banks are fundamentally sound, shares are priced compellingly. Lloyds at 25p trades at 0.35 of book value.
BoE Tenreyro defends negative rates
Bank of England rate setter Silvana Tenreyro defended negative rates in an article over the weekend, in what we could construe as a careful piece of choreography to communicate the bank’s shift towards a state of outright financial repression.
She said there were ‘encouraging’ signs that there are no longer the same obstacles to cutting rates to below zero. But she’s been positive on negative rates for several months so we should probably not read too much into her comments.
Andrew Bailey remains the most important voice of the MPC and whilst he did not seek to quell speculation last week that the Bank is considering how to use negative rates, he did stress that it’s not in a hurry to pull them out the toolbox.
Brexit talks in focus for GBP
Brexit talks resume this week and despite all the noise, both sides want a deal. Whilst the UK threw a spanner in the works with the internal market bill, the real substance of the trade deal is what matters. On that front the EU and UK are about 90% there. The problem is the remaining elements and without these sorted there is no deal.
Nevertheless there is hope that they will enter the ‘tunnel’: the period of closed, detailed talks that would lead to a deal. If there is white smoke this week then sterling will rally strongly, but I would expect this to drag on for a while longer, for deadlines to be missed and for GBP crosses to remain exposed to negative headline risk.
The euro retained its downside bias after more jawboning from the ECB. Ignazio Visco, Italy’s central bank governor, said the euro’s recent strengthening is “worrying us because it generates further downward pressures on prices at a time when inflation is already low”. A slate of ECB speakers this week are likely to lean hard on governments to deliver fiscal support.
Chart: GBPUSD tests near-term resistance at 1.28
US Presidential Election: To Vote, or Not to Vote – That is the Question
As the 2020 US Presidential Election creeps into view, the United States is a country divided. With polarisation increasingly prominent, and ever-stronger partisan loyalty, the famed ‘floating voter’ is nearing extinction.
Whilst almost 40% of the electorate identify themselves as independents, these figures hide a residual bias which exists in most. Recent research has found that 93% of the electorate have some sort of partisan lean, with only 7% considered truly neutral. This illustrates the desire of many American voters to be considered independent, even if they are almost certainly going to vote for the same party in every instance.
And yet, conventional wisdom tells us that the most successful campaigns are those which reach out the middle ground and win over these floating voters. If the aforementioned research is correct, such a strategy may no longer be effective.
Instead, we suggest that turnout is the key to victory in modern US elections. The most important decision a voter can make is not who to vote for – for the vast majority this is a foregone conclusion. Rather, the voter choice that really matters is whether to vote at all.
One need only look back to 2016 to exemplify this point, where Hillary Clinton lost the election by less than 100,000 key swing state votes. By comparison, 4.4 million people who voted for Obama in 2012 didn’t vote in 2016, more than enough to overturn Trump’s wafer-thin victory.
Some research has even suggested that, had turnout remained at 2012 levels, Clinton would have won 323 electoral college votes – enough to deliver her the White House comfortably. In states such as Michigan, Wisconsin, Pennsylvania, Florida, and North Carolina, it was a failure to turn out their own voters which scuppered Clinton, not a failure to win over the centre.
Can Democrats recover African American vote?
The challenge for the Democrats in this election year, both at the Presidential and Congressional level, will be to recognise this as the root of their failure, and to take action in response. In particular, rebuilding African American turnout could prove decisive, after the 7% drop which occurred between 2012 and 2016.
Perhaps Biden’s choice of VP is a recognition of the importance of African American turnout. Although Kamala Harris is unlikely to provide an Obama-sized boost to African American enthusiasm, she may go some way to bridging that gap.
This is especially likely in the context of the Black Lives Matter movement, which could also help to increase turnout among minority demographics.
Which campaign will adapt best to mail-in ballots?
The prominence of mail-in ballots could throw a spanner in the works, though, with campaigns having to radically change their Get Out the Vote operations in response to the new circumstances.
Whereas previous elections have seen a focus on last-minute voter outreach, the early registration deadlines will mean that a longer-term strategy is required. The campaign which adapts to these changes most effectively will gain a critical edge come election day.
To vote, or not to vote: that is the question. The answer will decide who resides in 1600 Pennsylvania Avenue come 2021.
US election playbook: navigating the volatility with 40 days to go
- Temporary dislocation
- Too many variables
- Bigger risks ahead
Given the once-in-a-lifetime pandemic, the US election is being held in exceptional circumstances. All else being equal though, we can deduce something about how current polling might play out. The market consensus is that a Biden win and Democrat clean sweep will lead to higher taxes and regulatory risk for a large number of corporates, which will hurt equities.
There are however plenty of other ways in which the market might like a Blue-nami, from pragmatic trade policy to combined loose fiscal and monetary policy.
Could Biden open up trade with China again? The Democrat candidate is taking a hard line on China – which is playing well with both sets of voters – but will he become more emollient once in office?
Tony Blinken, a senior foreign policy adviser to Biden, said fully ‘decoupling’ with China as urged by Donald Trump is ‘unrealistic’ and ‘counter-productive’. Biden will instead reset ties with China while seeking to redress unfair practices on trade and IP. However, it will be difficult for Biden to withdraw Trump’s tariffs immediately, without gaining significant concessions.
Biden has to play the hand Trump dealt, but he might seek to drive greater consensus with China and work out a more pragmatic trade policy.
Biden may not have expressed much support for Modern Monetary Theory – in fact he was once a fiscal hawk in the old style – but under a Democrat Congress and White House there would be no rush to reduce the deficit.
In fact, Biden’s economic stimulus plans entail more borrowing. Whilst it is a stretch to suggest that Biden is a supporter of MMT, the economic and social backdrop has changed drastically in recent years and it is gaining traction in more corners of the Democrat machine.
Moreover, the Fed’s recent average inflation targeting shift opens up a new front for MMT proponents in explicitly pushing full employment as the primary goal of monetary policy.
At Jackson Hole the Fed announced a policy shift that ought to have a material impact on expectations around rates and inflation. The Fed is taking a more practical approach than in the past when it has been guided by theories about maximum employment, the Philips Curve and inflation.
Instead of saying that the economic outcomes need to fit its models – which have always been nothing more than a best guess – it will let the outcomes drive the policy. Some would say this is a step towards fully embracing MMT, even if Powell has been against this approach in the past.
The fact is that the crisis has thrown MMT from economic theory to economic practice without any real debate. Powell has embraced a central tenet of MMT – why should millions of people be thrown on the economic scrapheap and left unemployed as the price to pay for low inflation.
Under a Democrat-led Congress and White House, MMT proponents will gain a louder voice, with implications for federal economic policy.
Overall, whilst Biden’s tax policy might be tougher on Wall Street, trade and monetary policy could be easier. But it is not quite so straightforward as that. With polls close in the key battleground states and huge uncertainty over the potential impact of postal votes, it is currently difficult to put a price on any outcome, which in turn makes it hard to trade the election per se.
Going long or short based on the outcome is far too simplistic and you could just as easily call it wrong as get it right. What we can say is that the pandemic, the economic recovery and the monetary policy response are longer term going to matter much more. And so, all else being equal is far too simplistic a view to take in what’s a very complex situation.
Will the election outcome be contested?
The only thing the market wants is to get the election out of the way – the only real danger would be a long period of legal disputes post-election, but again this ought only to create volatility at the time and would eventually be forgotten once it all shakes out.
Veiled threats by Trump to not accept a Biden win are probably over-analysed. The Supreme Court (and Secret Service) would see to that. It turns out the most antagonistic election in a generation for the people of America might well end up merely a short term ripple when it comes to markets, given everything else they have to contend with in the long term.
With 40 days to go, the race is tight and in the major battlegrounds it is too close to call. Markets will be volatile and dislocations will occur that present opportunities. The best approach is to be agile enough to contend with both outcomes and no clear winner on the morning of November 4th.
You can follow our election coverage here.
Equity markets continue September slide
Stock markets in Europe turned lower Thursday after tough day on Wall Street left the S&P 500 close to correction territory. Six months on and with some big gains locked in, investors are starting to fret over the recovery ahead, with the Fed warning that the US economic recovery would suffer if there is no further stimulus and the UK set for a longer winter of discontent.
On Thursday morning, European equities traded lower but pared early losses after the first hour of trading. Asia was notably weaker. German business confidence improved a fraction. Donald Trump said he could overrule the FDA’s plans to introduce tougher standards for authorising a coronavirus vaccine.
The S&P 500 closed near its lows of the day, falling over 2.3% to 3,236 on broad market weakness as both tech/growth declined alongside cyclicals. The index is close to correction territory again – from its intra-day high at 3,588 the 10% corrective move sits at 3,229, Monday’s low point. On a closing basis, it’s 3,222.
What’s remarkable is that through all this selling, Treasuries are unmoved – 10s continue to print around the 0.67% region – why are bonds just not moving through all this equity market selling?
Risk sentiment deteriorating?
Whilst we can look at the rampant speculation and excessive valuations in big tech stocks unwinding over the course of September, we are seeing broader declines in other sectors that indicates deteriorating risk sentiment as we head into the autumn.
There may be several reasons behind this – less certainty over a vaccine emerging soon, second wave fears, the realisation that consumer confidence and spending in the economy will slump unless governments continue to inject stimulus and the usual volatility before the US election.
Trump continues to tease with comments around not committing to a smooth transition of power – of course there is no risk that he would somehow carry out a coup, but equally I fear there is almost no chance the election result will be confirmed on the night. Gore/Bush 2000 seems likely to be repeated but things are far nastier, far more polarised now than then.
More broadly perhaps we can put the sell-off in equities down to fading momentum in the economic recovery – PMIs are showing weakness, whilst other measures of economic activity indicate a levelling-off after the bounce back over the summer – at the same as there is no fresh stimulus emerging either on the fiscal or the monetary side.
Fed officials warn over US economic recovery, call for government support
Whilst central banks continue to stress that they will do whatever it takes, few additional concrete steps have been taken lately. Washington appears gridlocked over fiscal support.
Fed speakers issued a series of warnings about the path of recovery in the US. Jay Powell warned Americans would burn through savings and find it harder to sell their homes. Boston Fed president Rosengren warned of a ‘credit crunch’ by the end of the year with community and regional banks likely to come under pressure from more bad loans as businesses are forced to close.
Cleveland Fed president Mester also called for more fiscal stimulus to support the fragile recovery. Goldman Sachs lowered its quarter-on-quarter GDP growth estimate for Q4 to 3% from 6%, implying the economy contracting 2.5% in the quarter. Powell and Treasury Sec Mnuchin speak later today. Also watch the weekly jobless claims numbers, with initial claims seen at 845k.
UK chancellor abandons Autumn Budget
In the UK, chancellor Rishi Sunak is abandoning his planned Budget for a short-term round of targeted measures, which he will announce later today. This is likely to featured more targeted support for sectors like hospitality and travel. It’s clear on both sides of the pond that unless there is more fiscal support, the economic recovery will go into neutral and stall.
Only three weeks ago the government implored us to get back to the office to support city centres – what’s strange is that they did this without realising that cases would rise. Their risk tolerance for the spread is extremely low, which indicates a government operating on the fly.
Strong dollar pressures pound and precious metals lower
Dollar strength is weighing on its major peers as well as gold and silver, although the greenback’s advance just paused for a while this morning. Sterling has retreated to its weakest level for two months and is current sitting on the 38.2% retracement with the 100-day line turning into near-term resistance.
The pound remains exposed to several strong headwinds, including the risk of a no-deal Brexit, negative rates and a deeper and longer-lasting economic collapse than peers. Meanwhile gold fell below $1850 and has retreated 10% from the recent all-time high but found support at the 100-day DMA. Silver has broken the trend line after some very nasty price action over the last few days, but it too has found support around its 100-day line.
Chart: Cable holds 1.2690 for now, 100-day line becomes resistance
Chart: Dollar index advances with three white soldiers candle formation and possible gap close to 96?
Chart: Silver test 100-day line