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US Election Playbook: 3 outcomes for trading the market reaction
Election Night Volatility
Volatility, as viewed through the lens of the Vix, has already risen sharply in the lead up to the election but has been largely because of the surge in virus cases, and lockdown measures in Europe in particular, weighing on risk sentiment.
As far as the election itself goes, I think Trump is closer to victory than the pollsters, bookies and financial markets believe, which in itself favours election night volatility as states are called one-by-one, and a big response early Wednesday when European cash equities open to we would assume some clear result.
What also favours a large swing in futures pricing and in some FX crosses will be the way in which calls on individual states are made. With some states processing the in-person ballots before the postal ones are counted, and with some states allowing postal votes to arrive after Nov 3rd (as long as they are postmarked by this date), we could get an inaccurate and uneven sample when the West Coast polls close.
If the polls are correct and show a comprehensive Biden victory, volatility would likely ensue as investors call their accountants to assess their holdings in expectation of much higher taxes. FX crosses to watch will be focussed in the EM space (USDMXN, USDCNH among others) as a Biden win is seen as particularly positive for those currencies.
We’ve included three potentials outcomes (the fourth variant: Trump wins and Senate turns blue has been omitted since if there is a Trump surge it’s hard to see the Senate going Blue).
A little history: The stock market has risen under both Democrat and Republican presidents – stocks don’t really care who’s in charge. Moreover, ongoing monetary policy support underpins the equity market valuations – the Fed is not about to remove the punch bowl.
Whilst longer-dated Treasury yields have started to rise after a period of stagnation this appears to be on the expected increase in the money supply and fiscal expansion which would accompany just about any of the results. We should note that yields are very much within tight ranges and any significant break free to the upside would require a serious bout of inflation (as previously argued this may be the consequence of a vast increase in the money supply).
Fiscal stimulus is coming over the hill whatever the result – the only exception would be a contested result which would of course tend to create heightened volatility and a slower path to stimulus. Fiscal largesse will make a significant difference and we would tend to think that a Blue Wave result would support the largest fiscal expansion of the possible outcomes.
A Biden White House and GOP Senate increases the risk of delay, particularly if some of the new senators don’t feel like voting for huge increase budget increases. A disputed election would need to be resolved in the Supreme Court and Trump has just scored a big win with his new justice.
Whilst a disputed result is possible and would cause the most volatility, it is a) being over-egged since postal votes should not make a big difference in the key states and b) it certainly won’t come to the point where Trump refuses to leave office. Leaving the unedifying and frankly undesirable prospect of a disputed result aside, we can look at the three main possible outcomes and what these mean for the markets.
Red Rum: Trump win, Senate stays red
- Less stimulus – not the $3tn Heroes Act but something that is a little short of what the market had been hoping for. Removal of tax and regulatory uncertainty supportive of equity valuations, however.
- Nominal yields down and real yields more negative favours gold + growth stocks + multiple expansion: more upside for the S&P 500 with the removal of the expected increase in corporate and capital gains taxes and reduction in policy and regulatory uncertainty.
- Growth beats Value status quo
- Dollar could outperform in the near term with a strong post-election euphoric bounce until stronger economic, monetary and fiscal trends are reasserted and drag on USD – however, trade tensions could be a headwind for USD bears.
- Policies supportive of US shale and further drilling, increasing domestic supply. Less stimulus could be –ve for demand, therefore WTI prices could tend to fall, especially as it looks like the winter is set up for inventory builds. Global demand will matter more for commodities in general and even for oil there are greater forces at work than who’s in charge.
- Reinvigorated Trump with Senate support would likely see the president up the ante on trade, which would tend to be negative for emerging markets and boost the USD. It could also be a negative for European equities and the euro.
So Mauve: Biden win, Senate stays red
- Less uncertainty over policy likely to support equities, whilst a Biden presidency ought to see some degree of a reset with trade partners that would boost sentiment and corporate earnings.
- Stimulus delays could create near-term volatility but it would be in no one’s interests to drag their feet for long given any ballot box risk would be two years away.
- Tax uncertainty removed = +ve for equity valuations.
- Improvement in trade relations with partners and China could see EM supported as well as European equities/currency – would also tend to boost US corporate earnings
- Not as bad for the dollar as a Blue Steal result with trade reset likely to support flows, also less fiscal expansion a factor, but USD seen weaker in this outcome as part of broader downtrend.
- Little impact on commodities – arguably less stimulus creates headwind to recovery but broadly speaking the global post-Covid expansion will matter more, as well as the relative weakness of the dollar.
Blue Steal: Biden win, Senate goes blue
- It’s a reflation and redistribution thing – more stimulus = more spending + higher prices (tax reform nails the rich who have less marginal spending power than poorer folks)
- Timing is everything: do tax hikes get applied instantly and retroactively – which could spark selling into the year-end before stimulus floods through in the spring of 2021.
- Lots of stimulus is a +ve for stocks and favours Value stocks – less overall potential for the broad market but tilted in favour of Value again over Growth.
- Remember the fiscal expansion is two-fold: Covid relief and massive infrastructure boost.
- Rising nominal yields, steepening of the curve = bad for gold (unless and until inflation appears) + good for banks.
- Expected hike to corporate taxes and capital gains tax creates policy uncertainty and could generate additional volatility into the year-end as investors liquidate positions to realise returns prior to the tax rises.
- Higher corporate taxes and regulatory uncertainty increases risk premium for equities, whilst could see nominal yields rise and reduce the TINA appeal for equities.
- Seen as more negative for USD with fiscal expansion and tax/regulatory regime weighing on demand for US equities.
- Over the medium to long term, a Democrat clean energy push would restrict US output and reduce demand for oil products. Larger stimulus would boost demand near-term – also watch as to whether a Blue Steal result leads to a deal with Iran that brings more production onto global markets.
- Result likely +ve for emerging markets with dollar weaker, better trade relations – look to USDMXN, USDCNH upside in this scenario.
- Better trade relations with partners a +ve for Euro (see weaker dollar narrative) and for European equities, particularly cyclical names.
Key question that will remain unanswered on Nov 4th: Does the gigantic stimulus that Biden and company would unleash flood the US economy with too much liquidity at a time of strong economic recovery, creating inflation and leading to monetary policy uncertainty?
In other words, do we get so much fiscal stimulus that the Fed becomes cornered and is forced into hiking rates much sooner than planned?
Polling continues to show Joe Biden commanding a roughly 7.5pt lead nationally, whilst in the key battlegrounds, the lead is less than half at 3.4pts.
There are ranges and differences between states, but the broad picture remains that a Blue Wave is to be expected if we take the polling data as accurate. However, on a personal basis, my belief is that Trump has many ‘quiet’ supporters who do not show up in the polls, and many of whom will have been affected by the unrest over the summer. The Senate race is extremely tight right now but still indicate the Democrats just taking back control.
Latest Presidential polls as of Oct 29th, from RealClearPolitics (who power our election tracker):
|North Carolina||48.4||47.7||Biden +0.7|
Sector & Single Stock Volatility Picks
Within our Biden20 basket of stocks which could do well from a Democrat clean sweep, green energy stocks look most exposed to downside if there were a Trump victory since it would materially affect the expected regulatory backdrop for clean energy investment.
Biden plans to set the US on an “irreversible path” to net-zero carbon emissions by 2050, with an ambitious goal to build a carbon pollution-free power sector by 2035. The proposals clearly imply a far more aggressive shift away from fossil fuels than a Trump administration would pursue.
The proposals would also involve upgrading millions of commercial and residential properties over 4 years to increase energy efficiency, with among other things the installation of solar panels, which is a potentially huge growth area (Sunrun, Solaredge, FirstSolar in our Biden20).
We also note a positive policy position on EV (Tesla, Nikola) with plans to invest in 500,000 electric vehicle charging stations. European clean energy stocks would also benefit from a Biden win, whilst automakers like VW and Daimler could benefit too.
As far as the corporate tax agenda goes, there could be several companies who benefitted most from the 2017 tax cuts who see earnings cut in 2021 in the event of a ‘Blue Steal’ result. Among European stocks, those with a large exposure to US sales like Ferguson, CRH, Ashtead could see a reduction in EPS due to tax hikes – however, it is likely that massive infrastructure spending and stimulus would offer significant support to those names in particular.
Our Trump20 Blend includes some of the largest US stocks which benefitted from the 2017 tax cuts (and therefore could see the worst EPS haircut in the event of a Biden win and Democrat Senate).
These include Nvidia, Netflix, Salesforce.com, CSX, Boeing, Union Pacific and ServiceNow.
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 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
Stocks firm, earnings unmask weakness, OPEC+ decision eyed
European markets moved up again this morning after stocks rallied on Wall Street and futures indicate further gains for US equity markets despite big bank earnings underlining the problems on Main Street. Sentiment recovered somewhat after Moderna’s vaccine candidate showed ‘promising’ results from phase 1 trials. It is too early to call a significant breakthrough, but it’s certainly encouraging.
Cyclical components led the way for the Dow with top performers the likes of Caterpillar and Boeing, as well as energy names Exxon and Chevron up over 3% as the index rose over 500pts, or 2.1%, its best day in over two weeks. Apple shares regained some ground to $388 ahead of an EU court ruling today on whether the company should repay €13bn in unpaid taxes.
Asian markets were mixed, with China and Hong Kong lower as US-China tensions rose, but shares in Japan and Australia were higher. European shares advanced around 0.75% in early trade, with the FTSE reclaiming 6,200 and the DAX near 12,800.
However, Tuesday’s reversal off the June peak may still be important – lots of things need to go right to extend the rally and you must believe this reporting season will not be full of good news, albeit EPS estimates – such as they are – may be relatively easy to beat.
My sense is what while the stock market does not reflect the real economy, this does not mean we are about to see a major drawdown again like we saw in March. The vast amount of liquidity that has been injected into the financial system by central banks and the fiscal splurge will keep stocks supported – the cash needs to find a home somewhere and bonds offer nothing. It will likely take a significant escalation in cases – a major second wave in the winter perhaps – to see us look again at the lows.
For the time being major indices are still chopping around the Jun-Jul ranges, albeit the S&P 500 and DAX are near their tops. Failure to breakout for a second time will raise the risk of a bigger near-term pullback, at least back to the 50% retracement of June’s top-to-bottom move in the second week of that month.
Trading revenues, loan loss provisions surge at US banks
US bank earning highlighted the divergence between the stock market and the real economy. JPMorgan and Citigroup posted strong trading revenues from their investment bank divisions but had to significantly increase loan loss provisions at their consumer banks. Wells Fargo – which does have the investment banking arm to lean on – increased credit loss provisions in the quarter to $9.5bn from $4bn in Q1, vs expectations of about $5bn.
This begs the question of when the credit losses from bad corporate and personal debt starts to catch up with the broader market. Moreover, investors need to ask whether the exceptional trading revenues are all that sustainable. Shares in Citigroup and Wells Fargo fell around 4%, whilst JPMorgan edged out a small gain. Goldman Sachs, BNY Mellon and US Bancorp report today along with Dow component UnitedHealth.
UK retail earnings
In the UK, retail earnings continue to look exceptionally bleak. Burberry reported a drop in sales of 45% in the first quarter, with demand down 20% in June. Asia is doing OK, but the loss of tourist euros in Europe left EMEIA revenues down 75% as rich tourists stayed clear of stores because of lockdown. Sales in the Americas were down 70% but there is a slight pickup being seen. Encouragingly, mainland China grew mid-teens in Q1 but grew ahead of the January pre COVID level of 30% in June, Burberry said. Shares opened down 5%.
Dixons Carphone reported a sharp fall in adjusted profit to £166m from £339m a year before, with a statutory loss of £140m reflecting the cost of closing Carphone stores. Electricals is solid and online sales are performing well, with the +22% rise in this sector including +166% in April. Whilst Dixons appears to have done well in mitigating the Covid damage by a good online presence, the Mobile division, which was already impaired, continues to drag.
Looking ahead, Dixons says total positive cashflow from Mobile will be lower than the previous guidance of about £200m, in the range of £125m-£175m. Shares fell 6% in early trade.
White House ends Hong Kong special status, US to impose sanctions
US-China tensions are not getting any better – Donald Trump signed a law that will allow the US to impose sanctions on Chinese officials in retaliation for the Hong Kong security law. The White House has also ended the territory’s special trade status – it is now in the eyes of the US and much of the west, no different to rest of China. This is a sad reflection of where things have gone in the 20+ years since the handover. Britain’s decision to strip Huawei from its telecoms networks reflects a simple realpolitik choice and underscores the years of globalisation are over as east and west cleave in two.
The Bank of Japan left policy on hold but lowered its growth outlook. The forecast range by BoJ board members ranged from -4.5% to -5.7%, worse than the April range of -3% and –5%. It signals the pace of recovery in Japan and elsewhere is slower than anticipated.
Federal Reserve Governor Lael Brainard talked up more stimulus and suggested stricter forward guidance would be effective – even indicating that the central bank could look at yield curve control – setting targets for short- and medium-term yields in order to underpin their forward guidance.
EUR, GBP push higher ahead of US data; BOC decision on tap
In FX, we are seeing the dollar offered. EURUSD has pushed up to 1.1430, moving clear of the early Jun peak, suggesting a possible extension of this rally through to the March high at 1.15. GBPUSD pushed off yesterday’s lows at 1.2480 to reclaim the 1.26 handle, calling for a move back to the 1.2670 resistance struck on the 9-13 July.
Data today is focused on the US industrial production report, seen +4.3% month on month, and the Empire State manufacturing index, forecast at +10 vs -0.2 last month. The Bank of Canada is expected to leave interest rates on hold at 0.25% today, so we’ll be looking to get an update on how the central bank views the path of economic recovery. Fed’s Beige Book later this evening will offer an anecdotal view of the US economy which may tell us much more than any backward-looking data can.
Oil remains uncertain ahead of OPEC+ decision
Oil continues to chop sideways ahead of the OPEC+ decision on extending cuts. WTI (Aug) keeps bouncing in and off the area around $40 and price action seems to reflect the uncertainty on OPEC and its allies will decide. The cartel is expected to taper the level of cuts by about 2 million barrels per day from August, down from the current record 9.7 million bpd. Secretary General Mohammad Barkindo had said on Monday that the gradual easing of lockdown measures across the globe, in tandem with the supply cuts, was bringing the oil market closer to balance.
However, an unwinding of the cuts just as some economies put the brakes on activity again threatens to send oil prices lower. OPEC yesterday said it expects a bullish recovery in demand in the second half, revising its 2020 oil demand drop to 8.9m bpd, vs the 9m forecast in June. The cartel cited better data in developed nations offsetting worse-than-expected performance in emerging markets. EIA inventories are seen showing a draw of 1.3m barrels after last week produced an unexpected gain of 5.7m barrels.
Risk rolls over in early US trade
Risk appetite has well and truly rolled over. US stocks moved lower in the first hour of trade and continued to leg it south, while oil prices swan dived amid a very messy picture for global markets on Thursday afternoon. Walgreens Boots Alliance shares dragged on the Dow as the stock fell 9% after reporting weaker-than-forecast earnings amid some serious weakness in the UK. The dollar found bid as risk appetite turned south, hurting FX majors like GBPUSD and EURUSD.
Supreme Court rules on Trump tax records
Risk sentiment was a bit shaky anyway but it seemed to take a hit as Donald Trump suffered a defeat at the hands of the Supreme Court – not his favourite institution of late. The Supreme Court ruled Donald Trump’s finances and tax returns are fair game and should be seen by the Grand Jury, but it threw out rulings that allowed 3 Democrat-led Congressional committees to obtain Trump’s financial records.
This ruling relates to alleged hush money to women who have claimed to have had sexual relations with the president – a story Mr Trump said was irrelevant. That may be so, but his tax returns may interest voters. Whilst US legal proceedings are far from my area of expertise, I understand that if only the Grand Jury sees the documents it is very unlikely that they would become public records, which could have had serious repercussions for the election. Meanwhile Treasury Sec Steve Mnuchin was also on the wires, saying the Federal government would not bail out states that had been ‘mis-managed’.
Stocks, commodities lower despite solid US jobs figures
The move lower came despite some decent jobs numbers. Weekly initial jobless claims fell to 1.314m, better than the 1.375m expected and representing a decline of 99k from a week ago. Continuing claims fell to 18.06m, a drop of almost 700k and much better than the 18.9m expected. The previous week’s number was also revised down over half a million.
So, the picture in the US labour market is maybe not quite as bad as feared, but still horrendous. There is clearly a long way to go before getting back to pre-pandemic levels. Moreover, as the number of covid-19 cases rises across most US states, the numbers may well start to improve a slower rate.
At send time indices were at session lows, making new lows for the week – we could see further declines as risk appetite appears to have rolled over today. As of send time the Dow was down over 1.8% to 25,559 at the session low, whilst S&P 500 was down 1.5% at a low of 3,120, making it down for the week.
The dip on Wall Street added to pressure on European equities with the FTSE 100 down over 1.7% to a low at 6,046, taking it negative for the week. Having been bid up on Monday towards the higher end of the recent ranges for little reason we are seeing indices pull back closer to the middle of the June ranges – no conviction trade yet.
Dollar firms against pound, euro in risk-off trade
Meanwhile, sterling eased back as risk appetite soured and Michel Barnier said talks this week confirm that significant divergences remain between the EU and the UK. Sterling pulled back from its highs at the top of the new bullish channel on the news as well as the general risk-off tone but remains in a solid uptrend with GBPUSD ably supported above 1.26. Elsewhere in FX the risk rollover boosted the USD so EURUSD pulled back under 1.13.
WTI (Aug) fell sharply from around $40.50 a low under $39.30 in a very swift and long-awaited reversal – albeit probably a day late given yesterday’s inventory build. Expectations of a slower reopening in a number of US states is a worry for near-term sentiment and I have been calling for a reversal based on the technical set-up, which could see a return to the neckline at $35.
Blonde Money US Nonfarm Payrolls Preview
Blonde Money Founder and CEO Helen Thomas explains the political impact of today’s US nonfarm payrolls report – how will President Trump use a positive or negative print to his advantage with the 2020 US Presidential Election edging closer?
Catch more insight from Helen every week with Blonde Markets on XRay.
US Presidential Election: Not Red, Not Blue, but Green to win?
With a recent poll showing that 14% of registered voters see climate change as the most important challenge facing the country, victory in November may well hinge on the success or failure of the respective parties to own this issue. For context, such a figure implies that around 30 million voters could cast their ballots this Autumn with the environment at the forefront of their thinking – that’s two to three times as many as in 2016.
Of those who care about climate change, one-third describe themselves as ‘very progressive’, suggesting that it is the Democrats who have the most to gain from grasping the initiative on the environment.
Voters focus on green policies, but does Biden?
Despite this potential vote-grabber for Biden, the issue features only 25th on a list of policy proposals on the Biden 2020 website. His plan has three main avenues of execution:
- Reinstating Obama-era regulation through executive order
- Investing $1.7 trillion in green energy and jobs through an act of Congress
- Leading international treatymaking efforts on the world stage.
That’s a long way from the $16 trillion investment into the “Green New Deal” that Bernie Sanders was promising. Herein lies the dilemma which will ultimately decide Democratic fortunes this year – how can they appeal to the middle whilst also ensuring that their base turns up to vote? It looks like climate change isn’t a hill for them to die on.
Rebranding climate issues for rust belt voters
The electoral system also explains why the climate features so far down Biden’s list. The rust belt is a crucial cluster of states for both parties when it comes to grabbing electoral college votes, and many of these rely heavily on so-called ‘dirty industries’ for employment and prosperity. Pennsylvania is the main example of this, where Trump secured victory by less than 45,000 votes in 2016. As the third largest coal-exporting state in America, voters in this area may not react well to Biden’s green vision, allowing Trump to take home 20 crucial electoral college votes.
There is however an opportunity to re-brand green credentials as a wider vote winner. The climate issue is ripe for conversion into an anti-China policy, thanks to their role as global polluters in chief. With approval of China down to -40% in the wake of coronavirus, and Trump likely to leverage this sentiment in his own favour, the environment offers the Democrats a line of attack which can be employed without turning off their core base of support.
How will America’s Climate Policy shift after the US Presidential Election?
There are three main scenarios that could play out in the US Presidential Election.
Scenario One: Trump Wins a Second Term
With or without a Republican Congress, Pres Trump would likely continue to use executive orders to cut back the environmental regulations that were instituted by the Obama administration. So far, Trump’s repeals have included the moratorium on federal coal leasing and the extent to which federal agencies must take account of the environmental impact of their actions.
- This would benefit fossil fuel companies
Scenario Two: Biden beats Trump, and the Democrats gain Congress
In this instance, the Democrats would have carte blanche to deliver on all of Biden’s campaign pledges, including the $1.7 trillion of government spending. In the wake of coronavirus, huge government investment will be expected, providing the perfect cover for such a policy. However, with a majority only guaranteed for two years, and other objectives clearly taking priority, it is unclear whether a Pres Biden would deliver the entirety of his environmental agenda, even in the greenest of scenarios.
- This would benefit companies that can boost their green credentials
- It would harm “dirty energy” businesses
Scenario Three: Biden beats Trump, but the Democrats fail to capture the Congress
Here, Biden would have to rely on the power of executive orders and the office of the Presidency to implement parts of his climate proposal. As easily as Trump repealed them, Biden could reinstate Obama’s regulations. Also, he could use America’s status on the world stage to influence treatymaking and catalyse future climate accords. However, the $1.7 trillion investment in green energy and jobs is not possible without congressional approval, leaving the former VP with a half-delivered promise.
- This would be like half a heart transplant: the economic damage of regulation would be incurred, but without investment elsewhere to compensate
Despite any green rhetoric, the truth is that the environment simply isn’t a priority for the Biden campaign, and this is unlikely to change once in office. A New Deal might be in the offing to respond to the huge economic downturn, but it’s unlikely to be a very Green one.
How will the US-China relationship define the Presidential election?
Trump knows that antagonising China is a dangerous game. But in the run up to the election, it’s also a political necessity.
Before the coronacrisis, there was already a perfect storm of economic and security disputes brewing between the US and China. Covid-19 compounded all the existing issues as well as adding a whole new dimension to the rift. Tension is escalating on all fronts.
Phase one of the trade deal is dead. The promises made by China – purchasing at least $200 billion in US exports over two years – looked unrealistic from the get-go. But the virus means meeting phase one’s targets will be downright impossible. Throw in that China is already buying more from competitors (its imports from Brazil are up 35% on May 2019) even in an economic downturn, and any revival of the Trade Deal before the Election look dead and buried.
The tech war has entered a period of unprecedented turbulence. Trump continues to affirm that Huawei threatens national security, upping the ante in May when a new rule was issued barring Huawei and its suppliers from using American technology.
The Trump administration is reportedly exploring several measures that could punish China for its handling of the virus, including suing the Chinese government for reparations and cancelling US debt obligations to the country. Meanwhile, China has ordered its state-owned enterprises to stop purchases of US farm products after the US threatened to withdraw its special status treatment for Hong Kong – itself a response to China’s new security law for the territory.
The President was aiming to run his campaign based around strong economic performance, and failing that, a successful response to the pandemic. As both these options become increasingly difficult to achieve, China must serve as the scapegoat on which Trump can pin his administration’s failings.
Usefully for Trump, the American people aren’t too fond of the Chinese right now either. A Pew Research Center poll from April suggests that Americans have increasingly negative views of the country with two-thirds now holding an unfavourable opinion towards China.
This sentiment is widespread across a range of groups in America, which is unusual in an ever more polarised electorate.
A Republican ad campaign has been launched proclaiming, “One nation deserves the blame: China”, while the America First Action SuperPAC says it’s spending around $10 million on ads in swing states condemning Biden over China.
It’s rare for two thirds of Americans to reach such a strong consensus so inevitably both the incumbent and his challenger are attempting to burnish their anti-China stripes.
Each also believes they can use China to score personal points against the other candidate.
- Trump is quick to criticise “Beijing Biden” and his son’s alleged profiteering from Chinese business.
- A recent Biden campaign ad reads, “Trump rolled over for the Chinese. He took their word for it.”, and goes on to cite some of Trump’s early remarks praising China’s pandemic response.
This fight isn’t without its risks however.
- In May, Biden’s aforementioned ad sparked outcry from representatives of Asian American Organizations who accused the Democratic candidate of feeding the rise of anti-Asian racism in the US.
- For Trump, a new economic cold war would imperil any incipient return to growth not to mention leave it isolated when big global discussions take place. Hence the recent decision by the US Commerce Department to allow American companies to collaborate with Huawei on 5G technology standards.
As we know though, Trump is no stranger to risky political moves. With winning the election his top priority and alternatives running out, the President will hold onto the anti-China card for dear life to avoid being trumped by Biden.
The battle of ‘who’s tougher on China’ shows no signs of relenting. Both candidates will be forced to push harder and harder to have the last word on an issue which has galvanised such a strong reaction among the American public.
Stocks nudge up, GBP breaks higher
Stock markets continued to strengthen as economies re-open but have yet to retest last Thursday’s highs. The unrest in the US is not likely to have a material impact on equity markets in the near term, largely because of the large-cap weighting, but we should caution that it has the potential to delay the economic recovery in the US.
People who would have been going back to work, spending in restaurants and bars, reopening their stores, will not in this febrile environment. President Trump is doubling down on using force to combat the unrest.
There was news on Remdesivir from Gilead – shares fell as the company reported indications that the drug has some positive impact, but it’s a long way from a slam dunk Covid-beater. Shares fell more than 3%.
So far, the situation with Hong Kong and simmering US-China tensions are being shrugged off. News that China was reducing soy imports from the US temporarily dented risk appetite yesterday. Today China’s foreign ministry said there was no information on any soy bean halt. Could be a load of rumours, but we should be very attuned to further developments on this front.
On the whole investors continue to see the glass half full even though the real extent of the economic damage is yet to be really felt. Furlough schemes and government bailouts may insulate people and companies from the shock, but these only delay the pain.
The FTSE 100 had a look at 6200 again this morning having moved added 90pts to 6,166 on Monday. Thursday’s peak at 6,234 remains the bull’s target for the cash market. The DAX moved to 11,900 with bulls eyeing the 200-day moving average at 12,100.
US stocks climbed by around a third of one per cent despite the civil unrest dragging on and drawing some attention. The S&P 500 finished at 3,055, above its 200-day moving average and making a high at 3,062 in the process, just short of last week’s peak at 3,068. The Dow is trading around the 25,500 level with the 200-day SMA in sight at 26,360.
It’s a very light day for data but overnight the RBA left rates on hold at 0.25% and signalled a more optimistic view of growth. ‘It is possible that the depth of the downturn will be less than earlier expected,’ Governor Philip Lowe said. AUDUSD is stronger, moving back to 0.68 and its best level since January.
News this week will be crucial – US services ISM on Wednesday and the nonfarm payrolls on Friday – for getting more of a handle on how much damage has been done and how quickly businesses are recovering.
Crude oil continues to hold the break on hopes that OPEC+ will agree to further extending the deepest production cuts. OPEC is set to meet June 4th now, with market participants expecting the cartel and Russia to rollover the May-Jun level of cuts for another 1-3 months.
Having brought the meeting forward it looks like OPEC+ will extend the most aggressive cuts of 9.7m bpd through to the end of the summer, though an extension for the rest of 2020 looks off the table. As noted yesterday, with compliance at just 75% last month, all else being equal, OPEC will need more time to rebalance the market as it wishes.
In FX, sterling has made a nice move higher, with GBPUSD breaking north above $1.25, after there was talk of a Brexit compromise ahead of the next round of talks this week. According to reports, the UK is making the first move to compromise – let’s see if the EU can be flexible enough to get a deal done. GBPUSD pushed through the 23.6% retracement around 1.251, potentially opening up a move back to the Apr double top above 1.26.
Removing a no-deal risk at this time would be a significant boost to the pound right now and may well take cable back above 1.30.
Stocks off a little at month end, US-China tensions rise
What did they do just when everything looked so dark?
Man, they said “We’d better accentuate the positive
Eliminate the negative
And latch on to the affirmative”
Stocks are ending May on a slightly downbeat note, but investors have definitely been accentuating the positive this week and for the whole of May.
Thank goodness, Covid-19 is getting bumped off the headlines; trouble is it’s not for good news. At last though we are seeing some caution displayed in the markets over China’s decision to impose national security legislation on Hong Kong and the ensuing ramp up in US-China tensions.
US stock markets close in the red, Trump to give press conference on China
US stocks were positive for most of Thursday before sharply reversing in the last hour and closing in the red, after the White House announced that Donald Trump would hold a press conference on China on Friday. ‘We are not happy with China. We are not happy with what’s happened’, he said. The UK, which signed a joint statement condemning China for its actions with Australia, Canada and the US, is opening the door to citizenship for 300,000 Hong Kong residents.
Given how stretched valuations have become, worries about US-China tensions don’t seem fairly priced in. As previously noted, investors need to be prepared for things to get worse from here, particularly given the back drop of a looming election for a second term, the worst recession in memory and 100,000 deaths from Covid – blamed on China – and the trade war, which is still rumbling on.
The pressure on Donald Trump at home is high. The press conference today will likely see Trump increase the war of words with China but he could go further an announce further sanctions on individuals associated with law, or revoke Hong Kong’s special status with the US on trade.
The S&P 500 was up most of the session but closed 6 points lower at the death, whilst the Dow fell 0.6% to 25,400, crumbling 300 points in the last 45 minutes of trading on the news of the White House presser.
Overnight, shares in Hong Kong fell again. European equities followed suit on Friday, declining by around 1% after a decent run in the previous session. The FTSE 100 faded off the 6200 handle reclaimed on Thursday. Hong Kong and China focused HSBC was down another 2.5%. But the FTSE was still headed for a roughly 200-point gain this week. European equities are still firmly higher this week as investors rotated somewhat away from the Covid/tech/quality play and back into cyclicals as economies reopen without undue rises in cases.
The Nasdaq, which has notably outperformed on a year to date basis, has markedly underperformed benchmarks this week. Remember it’s the last day of the month of May – it’s been a solid week and month for equities so investors may seek to take a little risk off the table going into the weekend and into June. The Hong Kong/US/China situation is all the excuse needed.
Data continues to show the dire economic impact of Covid-19
The economic data still stinks. 1 in 4 Americans have lost their jobs since Covid hit. US initial jobless claims rose another 2m to top 40m. But it’s slowing, with the weekly count down again for the 8th straight week. Moreover, continuing claims fell 3.9m to 21.1m, which indicates the labour force is returning – hiring is beating firing again, but it will be a long slow process to recover the 40.8m jobs lost, far longer than it took to lose them. A portion will be lost forever.
The US economy slowed more than previously thought, with the second GDP print for Q1 at -5%, vs 4.8% on the initial print. The Atlanta Fed GDPNow model forecasts Q2 GDP down 40.8%.
French GDP in the first quarter was down just 5.3% vs the 5.8% initially printed. Retail sales and industrial production in Japan both declined by more than 9%. Retail sales in Germany dropped 5.3% in April, not as bad as the -12% forecast – spendthrifts! Meanwhile those frugal French consumers spent even less than forecast, with spending down more than 20% vs a 15% declined expected. France is though reopening its culturally vital bars, restaurants and cafes from next week, so that should get consumers parting with a few more sous.
Dollar offered despite risk-off trade in equities
Despite the risk-off to trade in equities the dollar was offered into the month end. The euro extended its rally after breaking the 200-day moving average yesterday, with EURUSD pushing up to 2-month highs at 1.11. The March peak at 1.1150 is the next target. Sterling was also firmer against the buck, with GBPUSD recovering the 1.23 handle, trying to hold the 50-day line as support.
Shares in Twitter declined by more than 4% as Donald Trump signed an executive order that paves the way for legislation to tighten rules for social media platforms around third party content liability. It’s probably all a lot of hot air and distraction as he pursues a personal vendetta following the fact check warning on a couple of his tweets. Nevertheless, we have consistently warned that social media companies will need to face up to more and more scrutiny and tighter regulation around content distribution and the use of personal data.
Oil first fell but since recovered after EIA figures showed a build in crude oil inventories. Crude stocks rose 7.9m barrels, though inventories at Cushing, Oklahoma, declined by 3.4m. WTI (Aug) was hovering around $33 at send time, just about slap in the middle of its consolidation range.