With the lack of economic data this week, expect US Presidential drama to be in play this week.
As of Friday afternoon, it appears that most media outlets are ready to call Joe Biden the 46th President of the United States. However, don’t expect current President Donald Trump to go down without a fight as he has already asked for recounts in several states and has filed lawsuit in others. Brexit returns to the headlines as this week brings mid-month, supposedly the new “deadline” date for a UK-EU trade deal. The UK’s Boris Johnson and EU’s von der Leyen are expected to meet on Saturday. In addition, the coronavirus is reemerging in the US as Republicans and Democrats reunite to try and hammer out a new fiscal stimulus deal as soon as possible! With a light economic calendar this week, headline drama may prevail in the US and Europe!
Let’s assume that Joe Biden is named President by Monday morning. What does that mean for the markets? Why are stocks higher this week and why is the US Dollar getting absolutely destroyed? First, as it became clearer towards the end of last week that Joe Biden would win, the market began to price in a new fiscal stimulus package, even if one is not agreed to by the end of Donald Trump’s term (January 20th. 2021). The reason is that Democrats want a large package, which means more money in the system (lower UD Dollar) and more money to spend (higher stocks). Second, although some states may take until the end of the year to figure out their Senate races, it appears that the Republicans will maintain control of the Senate. As such, checks as balances will remain in place (as opposed to a Blue Wave sweep of Congress which many suggested before the elections). It will be more difficult for Biden to raise taxes on corporates and high-income taxpayers. Finally, there is a sense of optimism that Republicans and Democrats CAN work together. Joe Biden and Senate Majority Leader Mitch McConnell went through the ranks of the Senate together. They are friends. There is more a sense of reaching across the aisle to get deals done. However, before January 20th, Donald Trump is still President. There will be some uncertainty and nervousness in the next few months. Will there be a peaceful transfer of power? Will Trump continue with his aggressive trade policies? Will there be a fiscal stimulus package soon, and if so, how large? The markets will be searching for answers to these questions over the next few months.
Friday is November 13th. Some would call it the middle of the month, which is when the deadline was pushed to from October 30th regarding Brexit. Last week, officials met in Brussels to continue talks, and on Saturday, UK Prime Minister Boris Johnson and President of the EU Ursula von der Leyen will meet. Although the EU has softened it stance regarding fisheries, there are still areas where both sides are far apart, which include state aid and the EU’s demand for an independent oversight body to police the new deal. There are less than 2 months left in the year, and a deal must be reached soon for it to be presented to the EU Parliament when it meets on November 26th. There is potential for a good deal of volatility on GBP pairs and the FTSE over the next 3 weeks!
The coronavirus took a week off from the headlines this week due to the US elections. However, it is back with a vengeance in the UK and Boris Johnson was forced to lockdown the country on Thursday. The tiered level system was not working as the virus spread across the UK once again. Orders are in place to stay at home, except for universities, colleges, schools, and manufacturing businesses. This will remain in place until December 2nd, when the country will return to its tiered system. The Bank of England increased gilt purchases on Thursday to GBP150 billion and revised the UK’s Q4 GDP outlook to -2%. In addition, Chancellor of the Exchequer Sunak said in front of Parliament that the UK would extend the furlough program of 80% of wages until March.
Other European countries such as Spain, Italy, Germany, Ireland and France continue to be under some type of national restrictions or lockdowns. The ECB has indicated they will act at their next meeting in December as October data is already showing a slowdown across Europe, which will affect Q4 GDP. In addition, Denmark has begun slaughtering millions of minks, after a new mutated stain was discovered which can be transferred to humans.
In the US, as all eyes were focused on the Presidential election, the number of daily coronavirus cases surpassed 100,000, and it continues to grow. Although there most likely won’t be a national lockdown, some states are making masks mandatory in public, reverting back to virtual learning for students, and decreasing the capacity at restaurants and bars. The FOMC met on Thursday and indicated they would remain at QE of $80 billion of Treasuries per month and $40 billion of MBS. The committee is most likely waiting to see how much fiscal stimulus will be available before making their next move.
Although earnings season is winding up, there are still a few stragglers reporting this week. The most notable ones are as follows: BRK.A/B, MCD, KODK, LYFT, AMAT, CSCO, DIS, TCHEY, PDD, JCP, DKNG
The second week of the month usually brings a slow economic calendar, and this month is no exception. However, we will get the Claimant Count from the UK and the RBNZ interest rate decision. Other important economic data is as follows:
- China: Trade Balance (OCT)
- Japan: BOJ Summary of Opinions
- Germany: Trade Balance (SEP)
- Australia: NAB Business Confidence (OCT)
- China: Inflation Rate (OCT)
- China: PPI (OCT)
- UK: Claimant Count Change (OCT)
- Germany: ZEW Economic Sentiment Index (NOV)
- Australia: Westpac Consumer Confidence Index (NOV)
- New Zealand: RBNZ Interest Rate Decision
- Crude Inventories
- Japan: Machinery Orders (SEP)
- Japan: PPI (OCT)
- Australia: Consumer Inflation Expectations (NOV)
- Germany: Inflation Rate Final (OCT)
- UK: Trade Balance (SEP)
- UK: GDP Growth Rate QoQ Prel (Q3)
- UK: Industrial Production (SEP)
- EU: Industrial Production (SEP)
- US: Initial Jobless Claims (Week Ending Nov 7th)
- US: Inflation Rate (OCT)
- Business NZ PMI (OCT)
- EU: GDP Growth Rate QoQ 2nd Est (Q3)
- EU: Trade Balance (SEP)
- EU: Employment Change QoQ Prel (Q3)
- US: PPI (OCT)
Chart of the Week: Daily USD/CNH
There were so many charts to choose from this week, including the 7% move higher in the S&P 500, the 8.5% move higher in the NASDAQ 100, the 1.75% move lower in the DXY, the 11.5% move higher in BTC and the move in the Nikkei to highs not seen since 1991! However, USD/CNH seems to capture most of the sentiment around all of these, as market participants envision better (but not great) relations with China under a Joe Biden presidency.
Source: Tradingview, FOREX.com
On September 1st, USD/CNH broke lower from a double top formation near 6.8375. On its way down, price moved in a very orderly channel from the highs of May 27th down to Fridays lows near 6.5854. However, last week, the pair was extremely volatile. On the night of the election, the pair spiked higher out of the channel to 6.7741 (when Trump took the lead), before reversing and closing lower near the bottom of the channel at 6.6192 (when Biden was back into the lead). On Friday, the pair broke below the 161.8% Fibonacci retracement level from the January 20th lows to the May 27th highs, near 6.6138. It also broke below the orderly channel it had been so nicely confined to. The target from a double top is the height of the pattern added to the neckline of the double top, which comes in near 6.4840. THE NEXT SUPPORT LEVEL ISNT UNTIL THE MAY 2018 HIGHS NEAR 6.42! The RSI is diverging with price, so we may see a bounce back into the channel before continuing lower. Resistance isn’t until election night highs near 6.7741. Above there, next resistance is near the neckline lows from the double top at 6.8365.
With the lack of economic data this week, expect US Presidential drama to be in play this week. However, this may end up as a side-show if Biden wins most of the remaining states. In addition, Brexit will be front and center as the UK and EU search for an agreement. Coronavirus cases are on the rise again, but perhaps will see a surprise soon regarding a vaccine!
Have a great weekend and please remember to always wash your hands!