Life after the Death of Stimulus Hopes

With the elections just days away, the market will likely trade cautiously as volumes start to drop.

Published in

TRACKRECORD DAILY

8 min readOct 28, 2020

Hopes of a stimulus deal before the US elections on 3 Nov is now pretty much dead. With the elections just days away, the market will likely trade cautiously as volumes start to drop. Tomorrow will see earnings report from tech giants Alphabet (GOOGL), Amazon.com (AMZN), Facebook (FB) and Apple (AAPL). That and the resurgence of virus cases would likely hold the markets’ attention for now.

TRADING PLAN

Gold & Silver — Strong support for Gold is at 1850–60. For silver, major support is at 21.80–90 with minor support at 23.50–60. Stay patient.

Key risks — Hopes of a stimulus deal before the election is pretty much dead. The market will now move on to worrying about the impending US elections.

WHAT HAPPENED YESTERDAY

The Dollar fell 0.4% versus the JPY to 104.47. The usually risk-sensitive AUD, CAD, and NZD gained versus the USD. The CNH weakened against the dollar after news reported that China’s central bank had neutralised the counter-cyclical factor in its daily CNH midpoint fixing in a move to let the fixing more closely reflect actual market shifts. (USDCNH, +0.19%, 6.713). Trump acknowledged on Tuesday a coronavirus economic relief deal would likely come after the election, with the White House unable to bridge differences with fellow Republicans in the U.S. Senate as well as congressional Democrats.
U.S. Total durable orders increased 1.9% m/m in September (expected +0.7%) following a downwardly revised 0.4% increase (from 0.5%) in August. Excluding transportation, durable orders rose 0.8% m/m (expected +0.4%) on top of an upwardly revised 1.0% increase (from 0.7%) in August. Business spending continued to rebound, evidenced by the fifth consecutive increase in nondefense capital goods orders, excluding aircraft, which jumped 1.0% after increasing 2.1% in August. The print had limited impact on markets as politics and stimulus saga are the main drivers of risk.
New macro developments were lacking, and earnings reactions were generally disappointing, leaving investors grappling with the same growth/coronavirus concerns. The key difference was that these concerns were manifested in a more constructive way: decent gains in the mega-caps.
Accordingly, the S&P 500 consumer discretionary (+0.6%), communication services (+0.6%), and information technology (+0.5%) sectors finished in positive territory. Microsoft (MSFT 213.25, +3.17, +1.5%) provided support for the tech sector ahead of its earnings report after the close. No other sector within the benchmark index closed higher, and the cyclical industrials (-2.2%), financials (-1.9%), energy (-1.4%), and materials (-1.0%) sectors declined at least 1.0%.
Microsoft reported fiscal first-quarter earnings Tuesday of $13.9 billion, or $1.82 a share, up from $1.38 a share a year ago. Revenue reached $37.2 billion, up from $33.06 billion a year ago. Analysts on average expected earnings of $1.54 a share on sales of $35.76 billion, according to FactSet. Microsoft stock rose about 1% in after-hours trading immediately following the release of the results, but then fell -1.66% after the conference call. (Microsoft underwhelmed with its forecast for the fiscal second quarter, it guided for revenue of $39.5 billion to $40.4 billion in the quarter, lower than analysts’ average estimate of $40.5 billion, according to FactSet.)

HEADLINES:

TRUMP CONCEDES NO VIRUS ECONOMIC RELIEF DEAL BEFORE ELECTION DAY

Trump acknowledged on Tuesday that a coronavirus economic relief deal would likely come after the Nov. 3 election, with the White House unable to bridge differences with fellow Republicans in the U.S. Senate as well as congressional Democrats.

“After the election we’ll get the best stimulus package you’ve ever seen,” Trump told reporters at the White House before leaving on a campaign trip.

Trump and House of Representatives Speaker Nancy Pelosi have traded blame for the impasse over another large stimulus package worth around $2 trillion to help Americans weather the pandemic.

On Monday, Pelosi’s spokesman said she was hopeful an agreement could be reached before the elections.

But the White House began tamping down expectations for a major package before the vote. “The chances are slim,” White House spokeswoman Kayleigh McEnany said on Fox Business Network.

Thematic Context:“Either Congress passes the bill, or the markets will force it out of their hands via a selloff. We maintain that any meaningful retracements (approx -10%) in Nasdaq can be bought.” — 9th Aug 2020
“As stimulus effects wane off due to the lack of motivation to expand the balance sheet at this point in time, mainstreet economic woes floats back to the forefront. In our opinion, nothing has changed on mainstreet, jobless rates have been as high during the risk rally as it is now, but without the wealth creation effect in markets, problems suddenly seem bigger. As we have been saying, either the government prints the money, or it will be forced out of their hands via magnification of social and economic woes.” — 24th Sep 2020

U.S. WARNS OF THREAT POSED BY CHINA, SIGNS MILITARY PACT WITH INDIA

The United States and India signed a pact to share sensitive satellite and map data on Tuesday as U.S. Secretary of State Mike Pompeo warned of the threat posed by an increasingly assertive China.

Pompeo, who arrived in New Delhi on Monday along with Defense Secretary Mark Esper, said after talks with their Indian counterparts that the two countries had to work together to confront the threat China posed to security and freedom.

“Our leaders, and our citizens, see with increasing clarity that the Chinese Communist Party is no friend to democracy, the rule of law, transparency, nor to freedom of navigation, the foundation of a free and open, prosperous Indo-Pacific,” Pompeo said.

The United States planned to sell more fighter planes and drones to India. The pact will give India access to a range of topographical, nautical and aeronautical data that is considered vital for targeting missiles and armed drones.

Thematic Context: “The India-China conflict is key to watch as this event is a huge tailwind wind to the anti-china rhetoric that is gripping most of the western and “democratic world”(i.e. Australia, Philippines etc). India is the perfect counterweight to China in terms of size (almost equivalent) and demographics (superior demographic, largely young vs an aging Chinese population). Watch out for the Trump administration to throw its weight behind the situation and ramp up the rhetoric against China. In addition, India might be the beneficiary of the reshored supply chains out of China for the western world.”
For India to be the perfect counterweight, it first needs a competitive economy that will enable it to build up and sustain a sufficiently competent military which can serve as a deterrent to China’s geopolitical agenda. India may see an economic renaissance funded by “Cheap Dollars” out of this situation, leading to the rise of another emerging market superpower.” — 12th Aug 2020

RUBIO UNVEILS BILL TO KICK BLACKLISTED CHINESE FIRMS OUT OF U.S. MARKETS

Top Republican Senator Marco Rubio has introduced legislation to block access to U.S. capital markets for Chinese companies that have been blacklisted by Washington, threatening a blow against Chinese firms that rely on U.S. investors for funding.

The bill, which Rubio submitted late on Monday, would bar U.S. investment firms, retirement funds, and insurance companies from taking stakes in Chinese companies that have been placed on a trade black list overseen by the Commerce Department or added to a list of firms backed by the Chinese military according to the Pentagon.

If the legislation is approved, blacklisted Chinese companies would also be banned from trading on U.S. exchanges after a year-long grace period.

The legislation could hit surveillance camera maker Hangzhou Hikvision Digital Technology Co Ltd 002415.SZ, which was added to the trade blacklist for its involvement in China’s suppression of its Uigher Muslim minority and placed on the DOD list in June. It could also hurt China Telecom 0728.HK and China Mobile 0941.HK, which the Defense Department also labeled as backed by the Chinese military.

Thematic Context: “Did China just unofficially enter the “Tech War” with a powerful legislation that allows the CCP to veto any predatory American advancement on Chinese tech Intellectual Property? We think so and this adds a new dimension to the ongoing “Tech Thucydides Trap”. 1. The legislation is a warning shot to American threats on Chinese listed companies in the U.S. 2. It shores up and draws in investments towards Chinese jurisdiction/s (Hong Kong etc.) as it lays forth intent that China plans to ring fence its tech champions. This is positive for the RMB in the long run (USD/CNH grinds lower).” — 30th Oct 2020
“As tensions between Washington and Beijing rise, the potential decoupling of the world’s two largest economies presents significant risks, a prospect that is firming China’s resolve to shift reliance to its own vast domestic market. The gathering of the Central Committee, the largest of the Communist Party’s elite decision-making bodies, will focus on the 2021–2025 plan for the country’s social and economic development. It will be the 14th such plan since China embarked on rapid industrialisation under its first five-year plan in 1953–1957. We believe this will be positive for the CNH in the long run (USDCNH to trade lower over time).” — 10th Sep 2020
“This reform is a key marker to China’s long term geopolitical and economic intent to be a hegemonic force within its own economic faction (One-Belt-One Road) and a tech powerhouse, in which being dominant wields you the power of immense productivity on which superpowers are built upon. We believe that the trajectory of USDCNH is going to be much lower over the long haul and any decent spikes should be sold into.” — 19th Oct 2020

DAY AHEAD

BoC Rate Decision: The Bank of Canada meets later today. It last cut rates to 0.25% in March and has maintained it at this level since. With the economy showing signs of a recovery, the central bank is not expected to make any changes. If the rate statement indicates that members are optimistic about economic conditions, the CAD could strengthen.

Risk will continue to be driven by stimulus saga, U.S. politics & virus development.