One of the most anticipated days for the markets, the Election has approached us in the midst of one of the most turbulent years in the past decade. It is important to note the critical factors that the markets look for and a general overview of the markets.
Earlier today, as Biden strongly lead the race, commodity and equity markets were up firmly as the likelihood of a contested election faded away. However, with Trump planning to contest the election results alongside Trump claiming that the Democrats are stealing the Election by allowing votes to be continued after the ballots close, a contested election has come back into question. Markets started to retreat, with the Dow Jones pushing lower.
As predicted, volatility has been rocking the futures market today. Particularly with Gold, a commodity that was expected to do relatively well amidst the volatility has taken on an equity-like behavior instead of being a "save haven."
Equity markets have swung back and forth, with the S&P 500 and the Dow Jones being up / down 1% during the day. A little bit more consistent, the NASDAQ has been up above 2% for most of the day as many investors and traders retreat to tech stocks as a "defensive" play. With that said, U.S. futures near the tail end of the night grinded lower with European equities trading in the negative territory.
Another consistent player in the Market has been the U.S. dollar, as investors and traders sell positions to hold the U.S. It has rallied on risk-off trades. However, it has remained relatively flat. If you take a look at the cable, it essentially mirrors the dollar index.
The Democrats hope for a blue sweep have all but gone as Donald Trump clinches Florida and Ohio, battleground states that Biden hoped to win. Fabiana Fedeli, global head of fundamental equities at Robeco, said that "The blue wave trade has been going on since summer and has built up more recently, and I would expect to unravel now." However, she does warn that trading the outcome "makes no sense."
We can clearly state that we do not know what's going to happen in the next couple of hours. However, as all is said and done, markets should return back to a relative normal. Stay put. Stay safe and Trade safe.
Coronavirus. Vaccine? Biden. Next President? Brexit. Done in our lifetime? With a lot of uncertainty and volatility in the markets, what party do the markets want?
The historical sentiment was as follows – A Democrat government is said to increase taxes and increase spending on the welfare, therefore fewer earnings for companies, hence prompting a sell-off. This is somewhat true, with Joe Biden planning to implement a 4 trillion dollar stimulus plan, alongside an increase in taxes for people who make over $400,000. However, this round may be a little different. With Donald Trump's Coronavirus' response regarded by many as the Achilles heel for the United States recovery, the markets are slowly accepting a potential Democratic sweet. Now, investors, analysts, and traders are trying to see what a Democratic government will be in the future. Goldman Sachs Analysts stated in a memo that "All else equal, such a blue wave would likely prompt us to upgrade out forecasts," citing that a stimulus package after January may "at least match" the downsides of a tax increase. So what are the Equity Markets looking for? Well, either really – either a Republican or Democratic government will see a stimulus bill come sometime soon. However, a Republican government will see a stimulus bill and security in lower taxes for the foreseeable future. Therefore, there is a slight tilt for Republicans to get into power for the stock market to push higher.
For Oil and Fossil fuel energy, it is relatively easy to discern that they do not want the Democrats to get into power. The reason? Biden's $2 Trillion climate change plan towards greener energy. This would prove detrimental to oil giants such as Exxon and Chevron and may prove deadly for the US Fracking industry. The transition from Fossil fuels to cleaner sources of energy is starting to take place alongside the eventuality of Fossil fuels being cycled out.
There was a scene in the TV show "Billions," where one of the main characters convinces a Fossil Fuel giant to start the green initiative – on the basis that they will be there first when the eventuality comes, and they stand to reap the most profit. Logically, this makes sense, and we are seeing giants such as BP take this approach. However, for their shareholders now, a blue sweep with wining profits and betting on an investment will pay off in a decades' time? Terrible for the stock and the prices of Fossil Fuels.
Oh, did we mention the effect of Covid-19 on oil demand?
For Gold, its market thrives on volatility, which is no doubt is going to get. As we head into the elections and the Fed continues to pump the economy, we should see certain tailwinds boost Gold. As for what the yellow metal wants to be in power? Unsure. Both Democrats and Republicans will have the Fed continuing to lift the markets alongside further stimulus, which should weaken the dollar and boost inflation.
The US dollar wants the Republicans to get in, as a blue sweep may increase the costs of goods for exports out of the United States, therefore decreasing the demand for US goods. Many banks echo this sentiment, with Goldman Sachs, UBS, and Invesco Ltd predicting a weaker dollar on a Biden Lead.
Volatility is coming – Stay Safe, Trade Safe.
Markets today bounced back as stimulus talks have come back into question. The NASDAQ is up around 0.7%, while the S&P 500 and the Dow Jones were up 0.8% and 0.43%, respectively.
This is after the Market's fell around 1.4% a couple of days ago on Trump's tweet, stating that he has entirely stopped stimulus talks, saying Nancy Pelosi has been negotiating in "bad faith." However, Trump has slowly come back on the statement, as Trump allies believe it may have created the political risk he'd be blamed entirely for the economic fallout. He told Fox Business that he has reinstated talks about a stimulus bill and is now "starting to work out." "We started talking, and we're talking about airlines and we're talking about a bigger deal than airlines. We're talking about a deal with $1,200 per person, we're talking about other things."
The contested stimulus bill was between the Democrat's $2.4 Trillion dollar proposal versus the Republican's $1.6 Trillion dollar proposal. The Democrats have countered with $2.2 Trillion. However, the white house has not provided a counteroffer to that proposal. Nancy Pelosi is also pressing for language in the bill to limit Trump's ability to deliver virus testing and treatment funds to other projects.
Furthermore, we saw Brent Crude and WTI rise around 3.3% as energy companies on the Gulf coast evacuated 183 offshore oil platforms and halted nearly 1.5 million barrels per day as a safety precaution to Hurricane Delta. WTI and Brent are hovering around $41.25 and $43.32, respectively.
In the European markets, we saw the EUR/USD sell-off after ECB officials signaled that they were ready to ensure inflation moved towards their mandate, including slashing their already negatives rates and broadening their Targeted Longer-Term Refinancing Operations (TLTRO's), which stimulates banks to lend. EUR/USD is down around 0.2%.
Markets sold off as risk-off sentiment continue to seep into investors and traders' heads.
The largest move downward was in the Oil markets, where Brent Crude and WTI were down 7 and 8% respectively, fearing that the demand recovery as stalled. The Summer Holiday in the United States, primarily associated with peak demand in Oil, currently marked its close on the Labour Day Holiday.
Stephen Schork, the editor of the oil market newsletter The Schork Report, highlighted that "demand recovery at this point is certainly done" and that the "entire oil complex is under threat right now."
As suppliers slowly bring back their supply to the oil markets alongside demand tethering off, the weak fundamentals play into any risk-off sentiment the needs may have. IHG Markit analysts, Roger Diwan, stated that "The weak state of fundamentals and the lack of any catalyst improvement in the near term are resetting price expectations."
However, it wasn't just the oil markets that sold off. US equities had a deep day in the red, with the NASDAQ down 3.67%, with the Dow Jones and S&P 500 down 1.68% and 2.16%, respectively.
As expected, tech stocks being the highest growers, were also the fastest fallers. The question arises whether the current situation is a healthy pullback or a continuing trend. Tom Essaye, a former Merril Lynch trader, stated that "some froth has come off the market, which is a good thing, but keep in mind we still remain well over levels that could be considered as "fair value" in stocks.."
This pullback in the markets comes at a turbulent time politically and economically. Amidst the pandemic, Brexit talks have continued. US-China tensions are heating up again, China Hong Kong relations are heating up again. Elections are not in months – they're in weeks. Federal Reserve continues to pump liquidity into the markets. It is interesting to note there is not much movement in Gold, suggesting that the sell off may be due to profit taking, not pure risk off sentiment.
What was interesting about today's sell-off is that if you re-read the text before this, you will see no fundamental change/data released to suggest a sell-off. Whatever the actual reason is, be it options traders unwinding their positions, or general profit-taking, stick to your analysis and don't get swayed by a swing in price during a turbulent period – as it is to be expected. Remember, volatility goes both ways. If you're a trader, you may want to sit this period out or take the time to backtest your strategies. If you're an investor, you may want to buy the dip as your analysis shouldn't have changed today just because of the sell-off.
Tech and consumer equities lead the charge downwards as fears that the recovery has stalled in the US emerges. The NASDAQ is down 2.33% today, with the SP500 and Dow Jones down 0.66% and 0.7%. Priced-to-perfection tech stocks, even with better than expected earnings was not able to defend the lofty prices from the risk-off rush out of the market.
Fears that the US economy has stalled comes on the back of an unexpected rise in Jobless claims in the past week. Unemployment claims rose by an adjusted 109,000 to 1.4 Million, with analysts expecting 1.3 Million. However, unemployment in the US has decreased in the past couple of weeks as workers are rehired as the economy opens. However, as the US continues to grapple with the Coronavirus, many states have slowed reopening and therefore slowed rehiring.
The potential stall of the economy comes at an unwanted time, as the $2 Trillion stimulus package is nearing the end of its course. Currently, Congress is trying to negotiate another trillion-dollar package as the Coronavirus continues to ravages the United States. However, some people believe that the $600 weekly government payment has disincentivized people to go back to work, skewing the numbers. University of Michigan Labor economist Don Grimes stated that “the $600 additional weekly payment may have encouraged people to stay on unemployment..”
It is interesting to note the performance of specific markets around the world:
All major American, Australian, and European Indexes are down due to Coronavirus concerns – While the NZX 50 and the KOSPI, New Zealand’s and Korea’s major stock indexes respectively, are up for the week. Furthermore, It may be interpreted as the cogs in the markets are turning back to normal, slowly pricing in risk correctly. Furthermore, we can also see this in the Oil and Gold spot market, with Gold rallying admits Oil ranging, as the Oil demand fluctuates around the world. However, the Dollar index declined with treasuries rising, showing that the initial rush to hoard the dollar is slowly evaporating. Generally, this is a good thing for investors as it means rationality in the markets is gradually coming back.
Anish Lal did some great technical analysis on Gold - Will it reach $5,000?
NASDAQ retreats from its all-time high as Coronavirus cases in the United States reaches record highs.
States in the South and the West, such as California, Texas, and Arizona, reach record daily highs for Coronavirus cases, hindering their ability to reopen their respective local economies. The United States rose by near 38,670 today. This is on the back Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, warns of a “Disturbing surge” in Coronavirus cases. Massive companies like Apple have closed stores due to the spike, and Disney has delayed the opening of their parks until further notice.
NASDAQ’s drop from 10,300 back down to a low of 9,910 showed that even the tech stocks are not immune to Coronavirus fears. However, big tech is a favorite for many retail and institutional investors loved for their relative immunity to cashflow drawdowns, and tanks like balance sheets may provide possible safe havens for investors who are willing to buy the dip. However, it seems like many investors are eager to buy the dip – like they have been taught to do since the global financial crisis. Over the past couple of weeks post peak COVID lockdown, every headline I’ve seen red headlines on Bloomberg stating “*insert indices here* drops on *insert Coronavirus related problem here*”, they have rebounded in the days following.
With all the coronavirus fears seeping through the market, people are still optimistic about a quick recovery. David Solomon, CEO of Goldman Sachs, stated that there would be an “initial V-shaped recovery,” but noted that long-term recovery is ahead of the United States.
However, the United States is not the only country with Coronavirus blunders. Touted as having one of the best initial reactions to the Coronavirus, New Zealand’s government released information stating 51 out of 55 that were granted compassionate exemptions to leave quarantine were not tested, causing a massive backlash on the government. This has become a significant talking point for the opposition parties as election season nears. The NZX 50 is down 1.16% on the news.
As we start this long-term road to recovery, traders and investors must be aware of an increase in market volatility.
Are you buying the dip?
Have you ever woken up in the middle of the night after hearing a noise? You lie in bed with your ears listening in, but the sound is gone. However, you can't sleep because you don't know whether if/when that noise will come back, or whether its a threat. So you kind of just lie there, waiting. That is what the market is feeling right now. They are on edge. The question becomes, what do we do next? Do we try and sleep and ignore the threat that may not exist? Or get up and assess it head-on? It is not just the equities market that has been on edge; it's everything alongside with it.
Earlier, senior adviser to President Trump, Peter Navarro, spurred confusion when he replied, "It's over" to a question related to US-China trade negotiations. Markets everywhere acted with ferocity. The SP500, Oil, AUD/USD, and even Bitcoin reacted negatively on the news. However, just think about that for a second – two words were able for investors and traders to go, "alright, I'm out." In regular times, investors and traders would regard valuations as overstretched (as I'm writing this, NASDAQ futures hit their all-time high.) But now? In the middle of a pandemic? It's like everyone has their finger hovering over the sell button, scared of what the future has for their investments.
If we put on our econ/finance 101 hats on, equities are regarded as an anticipatory asset. The market anticipates future earnings and discount them, giving the stock price, however, as this graph from Bloomberg shows.
Expected earnings do not reflect what current prices show. Therefore it's justified that markets are on edge. As Didier Saint-Georges, a member of the investment committee at strategist at Carmignac Gestionput it, "Markets react to the lack of medium-term visibility by shortening their investment horizon - This explains the focus on the immediate recovery, and then catch up by cyclical stocks, but also the fragility of markets."
The oddity here is Gold:
Navarro's comments saw a sell-off in Gold – which is a contrarian move relative to how indices, oil, and AUD/USD moved. This could be due to investors and traders exiting their gold positions to enter riskier assets such as equities.
Traders need to be careful and keep an eye on the news, as the markets will react to any news that may change the fairytail outlook that it is currently pricing in. With investors, with a long enough time horizon, averaging down may be the best balance between being in the markets and getting the best price for your favorite equities.
The Financial Markets have a heavy data week ahead. With geopolitical tensions ratcheting up, and concerns turning to how governments will slowly pull back their unprecedented support, we are starting to see how the world reacts to a post-Covid world. Currently, they are 8.92 Million confirmed cases globally, with 467k deaths. Here is your week ahead.
With New Zealand entirely out of lockdown, threats of random Coronavirus cases popping up have increased. Facts have emerged from individuals entering the country with special exemptions and not adhering to the quarantine rules. Currently, the country has 1,161 confirmed cases, with 22 deaths. With the RBNZ implementing asset purchases of $30 Billion, the central bank was ready to take the full brunt of the Coronavirus for the financial markets. With that said, analysts predict the central bank to keep rates as is at 0.25%. Chairman Adrian Orr stated that negative rates are not out of the question; however, it is highly unlikely and will not come till next year. (Also a partial reason as to why negative rates could not be implemented in the first place is due to banks’ computers not being able to handle negative rates)
Similarly, to New Zealand’s Reserve Bank, the ECB has dedicated a sizable chunk to help the European economy recover from the Coronavirus. The Policy meeting hopes to discuss the future of the European economy, future monetary policy stance, and provide guidance on economic developments. This report will be fundamental in determining the mindset of the ECB, and what the future financial environment will be in the European Union.
With Coronavirus cases increasing above their average in many states, the virus remains front in center for many Americans. With election season coming up, President Donald Trump has resorted to opening the states with regard to the rising cases. Peaceful racial protests continue to fuel the spread of the Coronavirus. The previous unemployment claims dropped to 1.52 million last week, showing signs of American citizens going back to work. Analysts predict that figure to drop to 1.508 Million unemployment claims. With the consumer being touted as the backbone of the American economy, hopes are on the consumer to provide that initial boost to the economy. Analysts predict a drop of the Core Price index to 0.9% year over year, down from 1%. Furthermore, analysts predict a -5% Quarter over Quarter growth rate.
Investors and traders need to be careful of sudden policy changes affecting their trades and investments in the week ahead. Here is your market recap over the weekend
Markets the US and around the world are mixed as investors and traders take a cautious stance on the economy. NASDAQ edges a 0.29% gain, while the S&P 500 and Dow Jones ended lower at 0.78% and 1.09%, respectively. AUS 200 edges lower.
With the Coronavirus still front and center for many, investors are taking solace in "Coronavirus proof" equities – primarily in tech with their cashflow generating abilities during a downturn and their fortress balance sheets. This is on the back of Fed chair Jerome Powell stating that "we [the Fed] are not thinking about thinking about raising rates." However, it would be unwise to fight against them propping up the market. If they are committed to asset purchases alongside no drastic negative news with regards to the Coronavirus, major indices should continue to tick up. It is interesting to note the Fed's current dynamic, which is essentially a full believer of the markets during a boom, seem to doubt their ability to price securities in a downturn.
Many currencies have been ranging with no significant moves to the upside or the downside. The cable has been fluctuating from 1.252 - 1.257, while the AUD/USD and NZD/USD have been trading between 0.68 -0.69 and 0.64-0.65, respectively. Currencies have been heavily affected by the risk of/risk-off dynamic that has been played out recently in the markets. Traders have been flocking to the USD on any negative sentiment due to the Coronavirus, and vice versa, when positive signs emerge.
Oil markets have been struggling to cover the gap that was caused due to the Saudi / Russia price war and the Coronavirus. Brent and WTI are currently at $40.45 and $37.87, respectively, trying to cover that gap to $45.65 and $41.61, respectively. Furthermore, OPEC states they are committed to continuing the initial price cuts until the end of June; however, it maintains their bearish stance on oil demand. They forecast a drop of 9.1m barrels per day by the end of 2020.
With traders and investors experiencing relatively low-volatile trading days, this may be an excellent opportunity to assess current and future positions without the fear of the markets whipsawing against one's trade.
Large tech stocks have rebounded spectacularly in an environment where everyone is fully dependent on the wonders of the internet. The NASDAQ, which is heavily weighted to technology stocks, has outperformed the S&P 500 year to date by just under 14%, reaching an all-time high. Many analysts state that the market has been overstretched – with the Fed propping up the stock market and retail investors buying the dip. With regards to tech stocks, however, are these prices justified?
To keep it relatively simple, we’ll stick to the FANG stocks. If we take a look at their P/E Ratios over the past five years
We can see that Google and Netflix have historically traded at extremely bloated multiples, with Facebook and Apple trading at multiples relatively closer to earth. However, if we look at the current prices (as of 10th / 06 / 2020),
They are all currently trading below their average P/E ratio over the last 5 years. A bullish case could be made on the premise that if investors are consistently paying for their premiums even when their premiums were consistently questioned, would it not make sense that they have tentatively earned their bonus due to their ability to generate free cash flow during unprecedented times like these? If they were historically overpriced before the pandemic, would that suggest that they’re currently fairly priced? If we take it a step further – if they were priced reasonably due to their growth rate before the pandemic – would that suggest they’re currently underpriced?
With central banks lowering interest rates to 0, the search for yield has become short of impossible. Furthermore, treasuries have not performed as well as gold as the ballast for a typical portfolio. The cash position with the likes Facebook, Amazon, Microsoft, and Google are reaching heights even Berkshire Hathaway has not seen, with Microsoft also having the covenant Triple-A rating on their bonds. Their ability to generate revenue regardless of the conditions alongside fortress-like balance sheet solidify their position as a haven in many portfolios. In a world where interest rates are low, stocks like the Apples and Microsoft’s provide a chance at a positive yield dividend and capital appreciation.
PNC’s Financial Services Group, who amassed $14 Billion recently from the sale of its BlackRock stock, is waiting for valuations to cool off before putting their capital to use. Chief Executive Officer William Demchak stated that PNC “will be patient” and that “[the coronavirus] hasn’t begun to play out in our economy in terms of what the impacts are and what the opportunity set will be that comes out of it.”
Are you joining the tech stock rally?