A litany of negative factors conspired to push equities lower last week, with the U.S. S&P 500 down a chunky 5.6%. Rising COVID cases in Europe and the United States, new lockdowns in Europe, confirmation of no pre-election U.S. stimulus deal, Presidential election jitters (especially the risk of a contested result), and concerns over tech valuations were all contributing factors. It’s little wonder the market buckled! Nervousness is apparent given the fact the NASDAQ-100 dropped 5.5% last week even though all of the FAANG stocks beat earnings estimates.
U.S. equities are now at an interesting technical position, with talk of a potential ‘double top’ reversal. As seen in the chart below, the S&P 500 reached similar peaks of just over 3,500 on September 2 and October 12 and is now back testing its late September low at just over 3,200. The 200-day moving average is lurking a little lower at around 3,100.
Somewhat perplexing was the fact that U.S. 10-year bond yields continued to edge higher last week even as equities dropped, while the $US (more understandably) rose – the combination of which did not help gold, which edged lower. As evident earlier this year, the failure of bonds to rally may reflect an element of liquidation in favourite long trades in a bid to raise cash. Another theory is that it reflects concerns over ballooning U.S. public debt, especially given the likelihood of a large Biden stimulus package in the New Year.
In terms of the week ahead, the U.S. Presidential election obviously looms large. While polls are even more confident than they were four years ago that the Democrat (Biden) will win, markets remain understandably nervous – especially given the surge in postal voting could give rise to legal challenges if the result is tight. While a clear Biden win will likely lead to an immediate relief rally, the party may not last long if U.S. COVID cases keep rising and the risk of U.S.-based lockdowns intensifies. The fact that the UK felt the need to re-impose a one-month lockdown over the weekend will not help jittery global market sentiment. At least in the U.S., some comfort can be taken from the fact COVID cases (at least so far) are not escalating dramatically in the key states of New York and California – rather it’s most acute in the smaller mid-Western States.
Other key news this week will be U.S. payrolls on Friday, with another decent 600k jobs gain expected. Indeed, although it’s somewhat dated now, given surging COVID cases, recent U.S. economic data has remained encouraging – with decent declines in weekly jobless claims, still firm durable goods orders, healthy consumer spending and robust housing activity. Should he lose, Trump will rightly blame that damned virus!
Australia’s market was not spared from the equity sell-off, with the S&P/ASX 200 down 3.9% – leaving the market firmly stuck in the sideways range evident since early June. The $A also continued its retreat. Of some interest last week was the consumer price index, which bounced higher due to the end of temporary child care subsidies, but still left core annual inflation stubbornly low at 1.2%.
As now widely expected, the RBA will cut the cash rate and 3-year bond yield target to 0.1% tomorrow and announce a dedicated plan to buy more government bonds on the secondary market. The only lingering uncertainty is whether a specific monetary amount of bond buying will be announced and, if so, I expect it will need to be at least $100 billion over 12 months to get the market much more excited than it is at present.
While I have long expected the RBA to ease further (given its need to be seen to be doing something in the face of low inflation and high unemployment), I still feel it would have been better holding back what little ammunition it has left just in case we need a stronger morale boost later. As it is, Australia is handling the virus reasonably well compared to other Western democracies (which is not saying much!), though maintenance of over-zealous State border restrictions threatens to limit our pace of economic recovery.
The RBA’s latest set of economic forecasts – justifying its Tuesday move – is released on Friday.
Have a great week!
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