Equity markets eye European Covid count, US postal ballots become electoral flash point

Dog days on animal farm: it’s a very quiet start to the session with European indices trading either side of the flatline in the first hour as traders eye the rise in coronavirus cases across the continent. Basic resources, healthcare and tech were higher, offsetting broad weakness in the rest of the market with travel stocks leading the losses.

Europe’s rising Covid-19 cases cause investor alarm

As noted in the week ahead, the number of new Covid-19 cases across Europe is the number one thing to watch in the coming days as it has the potential to send nascent economic recovery into reverse. Germany has extended travel warnings to nearly all of Spain, which while making it easier to grab a sun lounger is taking the shine off travel and leisure stocks again this morning. IAG and TUI both fell another 3-4%, with EasyJet down more than 2%.

A sharp rise in cases in Spain, France and Germany will make traders nervous about new lockdowns and ensure that local equity markets remain volatile. Nevertheless, basic resources stocks registered strong gains in early trade to offset much of the losses elsewhere.

US stocks tried many times but failed last week to notch a record intraday high, falling shy of the Feb 19th peak at 3,393.52 several times. The problem is that this is not a simple bull market, with the split between growth and value plain to see. All stock sectors are equal, but some are more equal than others.

US data mixed, stimulus talks going nowhere fast

Last week, US retail sales were soft, although ex-autos the number was better than expected. Unemployment claims fell below 1m for the first time. However a stimulus bill has not been discussed by Congress and with the end of the $600-a-week stimulus cheques, there may be a tougher time ahead for consumers and companies dependent on them – 70% of the US economy is consumer driven, so the loss of this additional income will be hard felt.

Unless a stimulus package is agreed, stock markets may need to take corrective action. Even if bears don’t take control, a pullback from the all-time high to consolidate gains before bulls mount a fresh drive higher should also be considered.

Asia moves higher despite cancelled US-China trade talks

Asian markets were broadly higher on Monday but shares in Tokyo fell 0.8% as figures showed Japan’s economy shrank by the most on record in the second quarter, declining 7.8%. This works out at -27.8% annualised, which makes it the sharpest downturn since 1980 when such records began. It’s also the third straight quarter of contraction. We also note that Tesla’s new registrations in China fell to 11,623 units in July, down from 15,529, which may indicate a slower rate of recovery in the world’s second largest economy.

US-China trade talks slated for Saturday did not happen with sources blaming scheduling conflicts and a desire to give China time to increase its purchase of US exports. Meanwhile, in Washington developments around the November election are starting to heat up. Speaker Nancy Pelosi has called on the House of Representatives from recess to vote on a bill to ‘protect’ the US Postal Service, accusing President Trump of a “campaign to sabotage the election”.

Election officials are worried about delays that could mean ballots are not counted – a huge amount of extra demand this year because of Covid-19. Donald Trump doesn’t trust mail-in voting and has previously said he would block additional funding for the USPS. In short, Covid-19 has created a vast amount of extra demand for postal ballots and the White House recognises these are more likely to be Democrat votes.

Meanwhile the Democrat convention gets underway on Monday and lasts until Thursday, marking the end of the phoney war and start of the campaign proper. Watch for a speech from Kamala Harris, the VP candidate, on Wednesday, with Joe Biden to speak on Thursday.

GBP/USD in focus as Brexit talks resume

Brexit talks resume this week and the European Commission fired the opening salvo in the exchange, with executive vice president Valdis Dombrovskis warning that the City will have to wait beyond the end of the year for equivalence. Talks between the UK and EU resume on Tuesday. Last week David Frost, the UK lead negotiator, said that a deal ‘can’ be reached in September, and that the UK was not interested in threatening the EU’s single market.

However he also reiterated that Britain would never compromise on the jurisdiction of the courts nor on fishing rights. There is significant headline risk for GBP this week as August rolls on. Nevertheless, hope springs eternal as far as sterling is concerned. GBPUSD was trading above 1.31 with the dollar offered across the board and the dollar index taking a 92 handle.

US Presidential Election: Step Forward, Kamala

After months of deliberation and internal conflict, the Biden campaign announced this week that Kamala Harris would join his ticket this November. Praised for her articulate dynamism during the primaries, and famed for her debating acumen, this choice will inject some much-needed energy into the Democratic ticket

In the short term, this announcement will afford the Biden campaign a flurry of positive press coverage, likely leading to a bump in the polls. However, with almost three months to go until election day, this short-term hype is largely irrelevant. She won’t be able to move the dial where it counts: the swing states.

Harris’ well-spoken nature will help to keep the attention away from Biden as much as possible, reducing the risk of a race-ending gaffe. He can stay in his bunker while she takes centre stage. Whilst the presence of such a dynamic running mate will likely make Sleepy Joe look like Even Sleepier Joe, this will not impact the race in a meaningful fashion – voters have already made up their minds one way or the other on Biden: endearingly gaffe-prone or scarily senile.

Senator Harris brings with her two strategic benefits:

  • Law and Order
    • Criticised in the primaries for her overly harsh sentencing decisions as California’s Attorney General, this record will become an asset in winning over the centre, given the current climate of unrest. Although such a record upsets the left wing of the Democratic party, their votes can be relied upon as they are so keen to dispose of Trump
  • Campaign funding
    • Harris has deep roots in California politics – first as Attorney General and then as Senator. Her home state is notorious for its heavyweight fundraising capacity, particularly from Hollywood and Silicon Valley. Having built a decade long relationship with these donors, Senator Harris’ presence on the ticket will open up a huge reservoir of campaign funding. However, this flood of cash comes at a price. The Republicans will be eager to capitalise on this Hollywood connection by levelling accusations of ‘Liberal Elitism’ at the Biden-Harris ticket, which could be potentially damaging in the crucial rust belt states. Luckily for Biden, he has a long-established reputation as ‘middle class Joe’ which can neutralise this line of attack.

So, nationally it would appear that Senator Harris brings with her an injection of energy and a mountain of cash – both extremely useful on the national level. However, as Hillary Clinton discovered in 2016, the national vote means nothing without an electoral college majority. It is the swing states who will decide this election one way or the other, and it is in those states where the Harris pick is likely to resonate least.

Many have predicted that Harris, as a black woman, will help to achieve a surge in minority turnout. However, it should be noted that polling indicates only 6% of African American voters thought race should be a factor in the selection of a VP. And in any case, it was Senator Warren, not Senator Harris, who African Americans preferred for VP prior to this announcement. Therefore, if a surge in minority voting is to occur in November, it will not be as a result of Harris’ VP candidacy.

And a side note, if Biden does win this November, Harris will leave a vacant California Senate seat in her wake – one of the most liberal states in the country. The left vs centre battle that played out in the Presidential primary will be replayed in that race too, reopening old wounds and worsening Democratic divisions.

President Trump will be keen as always to profit from divisions wherever he can find them. He has already attacked Harris as being of the ‘radical left’ and ‘phony’. Being a woman of colour from California, Harris hits all of the Trumpian flash points – a chance for Trump to roll out his favourite electoral strategy of inflaming tensions and forcing the electorate to take sides.

Overall, Senator Harris will provide the Biden campaign with a much-needed sense of energy and a near-limitless supply of campaign cash. This will boost Biden’s chances of winning the popular vote but is likely to be less effective in the crucial rust belt states where she will simply play into Trump’s strategy of provoking disagreement between the haves and have-nots.

UK enters worst recession, European stocks steady after Wall St slips on stimulus doubts

What did I miss? Stimulus measures keep being debated, vaccine hopes are at first raised then more sensibly assessed, and stocks in the US keep going up; the S&P 500 has risen about 5%, whilst European markets are flat over the period. I seem to recall in July a lot of chatter about European equities outperforming, but there has been little to show from that trade so far. Gold has smashed a new all-time high and profits been taken, an easy win for most, whilst oil prices have barely moved.

UK economy posts worst decline since records began

So, what has changed? Britain’s economy is on the ropes, but we knew this already. UK GDP fell by 20.4% in the second quarter, which was largely in line with expectations. Economic activity is bouncing back – the economy grew 8.7% in June but remains well below the levels seen in February. Having been out and about over the last three weeks, I can safely say there will be more recovery recorded in July and August.

But getting back to 2019 levels of activity is going to take a very long time as we see permanent impairment in certain sectors of the economy, as well as behavioural and social changes. Cable recovered off the 1.3020 horizontal support formed by the low on Monday on the update to continue to trade its August range. With the dollar turning around and seemingly finding its near-term support, GBPUSD may struggled to hold its 1.30 level.

Gridlocked US stimulus talks weigh on stocks

The Democrats and Republicans can’t agree anything. Stocks on Wall Street slipped after gridlock in Washington left investors wary of pinning their hopes on a bipartisan stimulus package, but the S&P 500 was at one point just a few points from its all-time high at one point and could still take it out this week. Senate majority leader Mitch McConnell naturally blamed the Democrats for this but revealed the two sides had not spoken since Friday.

The Dow and S&P 500 both snapped a 7-day winning streak, whist European markets rose a touch on Wednesday’s open after a strong run-up on Tuesday. The FTSE 100 continues to trade the narrow range of the June pullback without any signs of breaking out.

Gold tumbles on profit-taking

The lack of fresh stimulus left gold bulls wary and profits were taken but we have seen a big bounce off some important technical support this morning.  Spot dropped under $1900 but found support on the old resistance at $1865 and the 200-period SMA on the 4hr charts may offer some technical support. More important is the trend support offered by the line drawn from the lows made since the March trough.

Gold’s rally has been all about stimulus and inflation and so doubts about whether there will be more stimulus saw investors recast inflation expectations a little and the technical exhaustion of the move needed to be factored in. US real rates rose, with 10yr TIPS back to –0.99%, having struck a low of –1.08% last week. Benchmark 10yr yields rose to 0.66% but whilst real rates are so deeply negative gold will have support.

Chart: Gold recovers $1,927 after finding support at $1,865

Biden picks Harriss as running mate

Joe Biden named Kamala Harris his running mate for the race to the White House. Two points about this really stand out. The duo needs to get the vote out, and Harris should energise many who may not otherwise vote, but they cannot risk losing the centre in the rust belt where the issue is the economy.

But the problem for Trump is that accusations that Biden’s VP pick was too zealous a prosecutor when acting as California attorney general make it difficult for Republicans to say the Democrats won’t be tough on crime. Her appointment will somewhat blunt Republican attacks on law & order.

The key question for investors is who wins in November and whilst details like VP picks are important, they are just a small part of the story. Trump still wins in my opinion whatever the polls are saying.

Kiwi weakens after RBNZ extends QE, opens door to negative interest rates

New Zealand is in full panic mode, locking down Auckland amid a mystery outbreak of Covid. The RBNZ duly announced it would expand the Large Scale Asset Purchase programme to $100bn, which just nudged the kiwi lower. But the real focus is on negative rates – a full four mentions of the committee looking at a negative OCR were in the release. Lower and negative rates is increasingly the path of least resistance for the RBNZ, which makes the NZD open to further downside risk.

Oil prices were up a touch, with WTI (Sep) taking a $42 handle this morning ahead of the inventory figures from the US Energy Information Administration, which are expected to show a draw of 2.9m barrels. API data yesterday showed stockpiles fell 4.4m barrels last week.

Elsewhere in FX land, watch the double top on the EURUSD pair with the rejection of 1.19 looking more convincing we look for neckline support around the 1.17 level to hold for bulls to make a fresh drive higher. However, the pullback in US Treasuries and uptick in yields may offer support for the dollar to push back hard.

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