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Market News 12.10.2020

US

The upcoming week is jam-packed with risk events.  First and foremost, stimulus talks will closely be watched to see if the Trump administration capitulates to House Speaker Nancy Pelosi’s demand to deliver a broader stimulus bill and not just a stand-alone bill to support the airlines.  The virus spread continues to intensify across most of the country and that will bring back stringent lockdowns and restrictive measures.

Earnings season is upon us and this time, expectations are high for the banks to kick it off with a bang.  The big US banks are likely to post a profit in the third quarter and see estimated provision for loan loss reserves decline significantly.

Technology stocks will likely take a queue from the reaction to Apple’s October 13 “Hi, Speed” event.  Apple is expected to unveil the biggest overhaul to the iPhone in years.  Four new iPhones that support 5g are expected to be released and if successful, could provide strong support to Apple and all of its suppliers.

US Politics

It has been a couple of tough weeks for President Trump. He lost the first presidential debate against former-VP Biden, caught COVID-19, and has seen his poll numbers slide even further.  President Trump is eagerly looking to get back on the campaign trail and is also pushing for only in-person debates.  This election for many is a referendum on the Trump administration’s handling of the virus and right now the virus spread is worsening in the US.  With 41 states seeing a rise in new cases and 23 states with at least a 10% surge in hospitalizations, the country does not seem ready to handle a winter wave that could make the virus spread much worse.

EU

We now know why policy makers were so keen to clarify Christine Lagarde’s comments on the exchange rate the weekend after last month’s meeting, with the minutes highlighting that they are indeed concerned about the pace of appreciation and the challenge it poses for inflation. I expect we’ll hear a lot more of these murmurings given the bloc has historically had with inflation and we could even see hints at more easing, with the challenges coming this winter.

Brexit

With one week to go until the mid-October “deadline” you would imagine the last week would have been very constructive as the two sides iron out the final differences and move towards a deal, but that wouldn’t be very Brexit, would it. This is going to the eleventh hour and that doesn’t mean next week. Another week of talks will take place and some compromise will be needed on the two remaining issues in order to signal there’s something worth taking to the last minute. This is going to drag on a little further and with every passing week, the pound is likely to increasingly see sensitivity to the prospect of no deal.

UK

No deal Brexit and a severe second wave of Covid remains the biggest downside risks for the UK economy in the final quarter and right now, both remain a significant possibility. The economy didn’t grow as expected in September and at 9.2% below pre-pandemic levels, hasn’t recovered to the extent the BoE anticipated. I imagine we’ll be hearing more easing noises from policy makers over the next couple of months with the extra QE funds running dry by the end of the year.

China

China released strong PMI data and saw impressive CNY appreciation on Friday after returning from an 8-day holiday.

Balance of Trade and Inflation data the week’s highlight with the political front quiet domestically.

Sentiment vulnerable to increasing anti-China rhetoric from White House and sanction threats on Tencent and Ant Financial.

Hong Kong

No data this week. Market anticipation building for Ant Financial IPO date which should come to market in the next two weeks before US election. Positive for technology stocks.

Evergrande dodging another debt bullet will give confidence to property sector equities.

 

India

RBI finally convened a new committee to announce rate decision Friday. The episode has been another black mark on India’s economic management.

Heavy data week Industrial Production still harshly negative, WPI rising and Balance of Trade negative continuing to hold India in a stagflationary embrace. Negative for Indian equities and fixed interest.

Covid-19 continues to crush economic activity and India’s potential recovery.

New Zealand

Election at the end of the week with the incumbent Labour Party set for landslide victory. Neutral to slightly positive for New Zealand Dollar and equities.

Covid-19 has been eliminated once again but RBNZ continues to be ultra-dovish announcing preparation for negative interest rates. NZ Dollar in danger of tracing a major bearish reversal as a result.

Australia

Federal budget well received. Business confidence data expected to show continuing rebound. RBA rate decision Tuesday, unchanged with market looking for negative interest rate comments. If mentioned, strongly negative AUD.

Stocks and currency positive on the back of firm commodity prices and data. Both though are vulnerable to the nuances of the dreaded Trump tweet next week.

Japan

Services PMI and Household Spending expected to show domestic recovery remains slow and patchy. Yen negative. Talk still circulates of further fiscal stimulus although authorities are reluctant to commit.

Japan equities vulnerable to Trump tweets along with the rest of the world. USD/JPY has traced out a major bullish technical formation implying a move to 108.00 or higher.

 

MARKETS

Oil

Oil prices are seeing a little profit-taking heading into the weekend following a 10% rally this week in response to a number of short-term bullish factors lifting the market. Hurricane Delta has been upgraded to category three and forced the closure of most oil production in the Gulf of Mexico, amounting to around 1.67 million barrels per day.

North Sea outages as workers strike over pay has resulted in another 330,000 barrels of oil equivalent per day of additional shut-ins and that could rise to 966,000 by the middle of next week if a resolution isn’t found.

That’s a lot of lost production, it’s hardly surprising we’ve seen the spike we have. It also means there’s a long way to fall if the Hurricane causes minimal damage and the strike is resolved.

Gold

Trump’s confidence in a stimulus package being agreed is rubbing off on the markets and risk assets are reaping the benefits.

And right now, gold falls into that bracket, having aligned itself with positive risk apetite this year rather than its traditional safe haven role. There is an added element here as well, with gold also typically viewed as an inflation hedge so a massive stimulus package could be doubly positive for the yellow metal.

Despite the market getting excited about the prospect of stimulus, I’m not there yet and think this gold rally may be a little premature, leaving it vulnerable to a further corrective move to the downside.

This will only be short-term – the decline since August is, itself, corrective – but I don’t view this month as strongly risk on unless something changes. Still, a move above $1,920 may reinforce the counter view, at which point the $1,960-2,000 region becomes very interesting indeed. There’s a cluster of resistance here which, if overcome, could be very bullish indeed.

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