Market Overview

19 October 2020

Markets Seem to be Poker-Faced On China Optimism Despite Lockdowns Across Europe and U.S.

The first Asian trading hours on Monday began with a moderate recovery of the U.S. S&P 500 broad market index futures by almost 1%, to the 3500 area and slightly above, after the markets' corrective closed below 3470 at the end of last week. A positive impulse came from Pfizer Inc after the drug maker announced it hopes to move ahead with the availability of a COVID-19 protective vaccine in the third week of November when at least the emergency use authorisation in the United States could be possible. That means the U.S. may have two vaccines ready by the end of the year, taking into account previous information that the Massachusetts biotech firm Moderna is aiming to seek authorisation by November 25. 

However, the initial upside gaps on Asian indexes were quickly "eaten" after the release of economic data from China. For example, the Shanghai Shenzhen CSI 30 started the day just near the highs of August, but then slipped and finished the trades with a daily loss of 0.76%. The Chinese economy performed at 4.9% year-on-year, if compared to the Q3 2020 reading of gross domestic product (GDP) with Q3 2019. This was much higher than the GDP growth estimate of 3.2% in July. The average forecast of analysts' polls predicted a potential 5.2% surplus in GDP. So, at least some part of the market interpreted the fresh data as mixed or even rather negative for the moment, also taking into consideration that the International Monetary Fund (IMF) announced a growth of 8.2% in China for the year of 2021. Chinese fixed asset investment was up by 0.8% in September, according to the same fresh data, which is a clear positive sign, as the fixed asset investments only contracted before each of the previous seven months in a row. Industrial production for September came at a high rate of 6.9%, which was also beyond the average forecasts of 5.8%, and better than a 5.6% rise in August. Chinese retail sales showed a nice improvement too, up to 3.3% year on year, and the unemployment rate dropped to 5.4% after 5.6% a month before. So, the data set may be considered as very encouraging, at least in terms of mid-term influence on market sentiment. 

It looks like most of the European investment community also believes that a China-induced recovery could be on the horizon and thus relies on earlier availability of vaccines. Major European indices opened trading on Monday with an initial modest rise. The price spikes in European markets lasted at least until noon, and those small jumps higher happened despite local and partial lockdown rules across Europe. A curfew in Paris and eight other cities affected about 22 million people, and it may last at least four weeks, the French authorities said. People in the capital, as well as Marseille, Lyon, Lille, Saint-Etienne, Rouen, Toulouse, Grenoble and Montpellier will have to stay at home from 9 pm to 6 am, with only "essential trips" permitted. 

The Spanish government has imposed a 15-day state of emergency in Madrid since Friday. Restrictions are being enforced by 7,000 police officers as city officials have challenged the government over the situation, saying cases are down and a state of emergency is unjustified. Thousands of people protested on the streets in the centre of Madrid, as almost five million people are affected by the restrictions that do not allow local citizens  to leave or enter Madrid for non-essential reasons, although going to work and school is possible. No social contacts between different areas are approved, hotels and restaurants are limited to 50% capacity and must close at 11:00 pm. In Catalonia, authorities have ordered all bars and restaurants in the region to close from 15 October for two weeks, and they can only provide takeaway services. 

A partial four-week lockdown started also in the Netherlands, valid from October 14. All bars, restaurants and coffee shops have closed and they are only able to serve takeaways. Also the sale of alcohol in shops and restaurants is banned after 8 pm, people are not allowed to drink alcohol in public after that time. All shops, apart from supermarkets, must close by 8 pm across the country. People are advised to stay at home and work from home as much as possible. A maximum of three people can visit a private home per day, and only four people can meet outside, but both rules exclude children under 13. Italy has made it mandatory to wear facemasks in outdoor spaces across the country. Even in schools, facemasks are mandatory for all children over the age of six when they move around the building. Adults cannot gather outside bars and restaurants between 9 pm and 6 am. At the same time, in Brussels, wearing a facemask is no longer a must in all outdoor areas. Sweden has now enforced lockdowns, but in line with government advice most people respected voluntary social distancing and started working from home where possible. The authorities just banned gatherings of more than 50 people and urged people over 70 to self-isolate - but shops, bars, restaurants and gyms have remained open. 

Germany has introduced a ban on large gatherings, such as public festivals, sporting events with spectators and concerts. The ban has been extended to the end of the year in areas with high infection rates, plus testing at airports has been made mandatory on arrivals from high-risk countries. German regions where the rate of infections is high, are limited in public gatherings to 50 people and private to 25, also people who provide incorrect identity information at restaurants and bars will be fined. In Berlin, private parties and gatherings are limited to ten. Outside and at night only, five people or members of two households are allowed to gather. 

One of the strangest bans is the so-called "sex ban" in London and some other places at the U.K., as Downing Street officially confirmed that couples who live in Tier Two and Three coronavirus hotspots can't mix indoors and must practice social distance if they meet up outside - even if they are in a long-term relationship. The Prime Minister's official spokesperson, when asked why there is not an “established relationship” exemption built into the tier system, just said: “Because the purpose of the measures that we have put in place is to break the chain of transmission in between households and the scientific advice is that there is greater transmission of the virus indoors." Asked again if the government expected affected couples to socially distance if they meet outside, the spokesman said: “The rules set out that people should follow social distancing and the hands, face, space rules." 

Despite the obvious absurdity of such formalism in official approaches to human relations, these restrictions may have little effect on the business activity of the suffering human beings in general - if it doesn't last long, of course. As for the continental economy, with the exception of a certain part of the customer service sector, the other business environment mostly seems to be adapting to work in a virus environment. Trying to survive, the European stock market is more concerned about the political situation developing across the pond than to worry about local problems, as the EU authorities swear they are not going to close the entire economy for a second time. Also, Europe should consider the recovery fund as a permanent tool, as the European Central Bank’s (ECB) President Christine Lagarde told Le Monde. So, she meant not only the distribution of a 750-billion-euro recovery fund before the beginning of 2021, but also a possibility of the creation of permanent fiscal tools and "common budgetary measures for the euro area" for which she expressed hope to be debated more intensely soon. 

As for the updates on the U.S. stimulus package saga, the Senate is scheduled to vote on Wednesday on a $300 billion Republican coronavirus relief bill although it is far below the estimated $1.8 trillion of a bigger White House offer after Democrats demanded Republican accept their own long cherished $2.4 trillion plan. However, even a small bill, dubbed a "skinny" relief bill because of its pared-down funding, was already rejected before by Democrats in September and is expected to fail again. Mitch McConnell, the Republican Majority Leader of the Senate, said in a statement on Saturday that the "skinny" bill vote would follow a standalone vote on additional Paycheck Protection Program (PPP) funds for personal support on Tuesday. It is worth noting that airlines alone have pleaded the Congress for a new $25 billion bailout to keep workers employed after a prior six-month payroll assistance program expired on Sept. 30, as 32,000 airline workers have been fired this month after funding ended. 

Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi spoke for an hour and 15 minutes on Saturday evening, but it seems that the main result of their long discussion is that their "staff will continue discussions, and they have agreed to speak again on Monday," Treasury spokeswoman Monica Crowley wrote in Twitter. Pelosi spokesperson Drew Hammill said that there was progress on the specific funds for coronavirus testing but "there remains work to do to ensure there is a comprehensive testing plan." Alas, that is not connected too much with the economic stimulus, although Drew Hammill added the numerous other differences "must be addressed in a comprehensive manner in the next 48 hours." But he added that, on their point of view, "decisions must be made by the White House in order to demonstrate that the Administration is serious about reaching a bipartisan agreement that provides for Americans with the greatest needs during the pandemic." 

Pelosi herself said in an interview with ABC’s ‘This Week’: “I’m optimistic because, again, we’ve been back and forth on all of this.” Donald Trump commented to reporters in Nevada: “I want to do it at a bigger number than she [Nancy Pelosi] wants. That doesn’t mean all the Republicans agree with me, but I think they will in the end." Mrs Pelosi's main negotiating partner, Treasury Secretary Steven Mnuchin, is in the Middle East until Tuesday. The combination of all this information may not seem like evidence enough that  the economy will receive what it needs to make a recovery in the short run. 

Meanwhile, the U.S. presidential rivals Donald Trump and Joe Biden are trying to woo early U.S. voters. Some 27.9 million Americans have already cast ballots either by mail or in person ahead of the November 3 election, according to the U.S. Elections Project at the University of Florida. The record figure is being driven by concerns about crowds at polling sites on Election Day during the pandemic, but the early votes may become a source of a potentially huge conflict after preliminary results will be announced during the hot night that is expected just after Election Day, as the election outcome may be contested. 

The Republican Ron Johnson, the senior United States Senator for Wisconsin and a chair of the Committee on Homeland Security and Governmental Affairs, is pressing the FBI Director Christopher Wray to confirm or deny details regarding a laptop said to have belonged to Democratic presidential nominee Joe Biden's son Hunter Biden. Ron Johnson said on Fox News that the FBI has a "duty to inform" the Senate Committee about the veracity of Hunter Biden emails. Johnson said in an official letter to Christopher Wray that a whistle blower from one private office for repairing notebooks contacted his committee on September 24, claiming to possess a laptop that Hunter Biden left at his business, and that he had turned it over to the FBI. Johnson noted that his staff immediately asked the FBI to confirm certain details in order to validate the claim, but the bureau said they would not confirm or deny any of the information included in their request. "The FBI has a duty to inform us. If they believe this was maybe Russian disinformation, they should give us a defensive briefing,” Johnson told “Sunday Morning Futures” TV program. “If, for example, they also believe that what information this whistle blower gave us is fraudulent, that would also be a crime, and the FBI should tell us that.” 

“Why did they sit on it? Are they covering up just because Hunter Biden might be engaged in things that also maybe should have been investigated and possibly prosecuted? Do we have two systems of justice: one for Democrats and one for Republicans? One for the well-connected versus one for the rest of the Americans?” Johnson asked. He added that he found Biden campaign’s response to claims that alleged Hunter Biden’s emails show his father met with a Burisma company executive “pretty odd”. Johnson's letter appears to indicate that the laptop in question is the same one referenced in a recent New York Post report about emails said to be Hunter Biden's. A proposed notebook contains a lot of compromising material against the son of Trump's rival but also a particular letter is said to point to whether Joe Biden met one of the owners of Burisma company to help his son, as Joe Biden has previously told  the public that he has never met any representatives of Burisma. So, altogether it has the potential to create a big scandal before elections, similar to the story with Hillary Clinton’s emails in 2016. It is not too much media noise for now, the indexes are high and the demand for safe-haven U.S. Dollar bonds is not too large, but the story may produce additional worries for markets, depending on further development of the matter.



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Lysakov Sergey
Market Focus

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