Market Overview

21 October 2020

Market Sentiment is Somewhere Between Stimulus Hopes, Virus Worries and U.S. Election Concerns

European stocks started the day slightly higher but then slipped to the negative territory before noon as hopes for a fresh monetary stimulus from the European financial institutions are fading on spreading virus concerns. The market sentiment doesn't look like any big sell-off now, but most traders are just cautious. One exception in the corporate world is, Ericsson whose stocks soared over 7% today after the telecom giant said its Q3 earnings were way ahead of market estimates, and its CEO was "more confident" in meeting the company's 2020 targets. Nestle shares gapped almost 2% after the world’s largest foods group raised its forward guidance for organic sales growth for 2020 and 2021 just after posting better-than-expected figures for Q3. But even Nestle prices lost all of their initial gains over several hours amid the background of common economic uncertainty. 

Mass media reported that Spanish authorities are considering local curfews in some hard-hit regions like Madrid in an attempt to narrow the circle of a potential contagion. The medical effectiveness of such measures is disputed even by some experts, not to mention social media users who are sarcastically joking that the virus is especially dangerous from 9 pm to 6 am in restaurants, but there is no big risk when traveling to the office and then back home. Be as it may, France has already imposed such a curfew regime in some of its major cities, including Paris. The British government has put a further three million people in the Greater Manchester area into its most strict 'Tier 3' lockdown category, which means closing many "non-essential" businesses that were vital at least for the workers of such closed small enterprises. 

More examples of partial lockdowns across Europe have already been discussed hereThe European Central Bank's (ECB) Governing Council is scheduled to meet next Thursday to set, or rather, update its monetary policy measures under Covid pressures. But many analysts are expecting that the ECB may just prefer to wait until December and not to extend its €1.35 trillion pandemic bond-buying program this time. At the same time, the ECB President Christine Lagarde said on Monday that Europe must not delay the recovery fund, but maybe she meant more government responsibility, common budgetary and fiscal measures, not obligations for new monetary moves of the regulator. Nevertheless, the single European currency is still trading above 1.1850 against the Greenback. 

In the U.S. market, Tesla is going to report earnings today after market close, as Elon Musk’s electric carmaker had to calculate the season bill, under an intense spotlight of the broad investment community. It would be important for Tesla to deliver an improvement in profit readings after the popular company with large capitalisation failed to convince S&P’s index guardians with the second quarter profits that it deserved a place in the S&P 500. Meanwhile, Tesla already posted record deliveries for Q3, but operating margins appear to have come under pressure as the company starts using its Shanghai factory, which was built in order to assist the company to somewhat dominate the world’s largest market and so Tesla can have the means to export to Europe and other parts of the world. 

At the same time, corporate stories may be good or even excellent, but that could not be enough for the solid and stable price growth of the company's assets. There are numerous examples of smaller companies that have reported very well in recent days, but with just a very limited or temporary growth of the shares' prices because of the general anxious sentiment at Wall Street before the U.S. presidential elections. According to Refinitiv data released on Tuesday evening, 66 companies from the S&P500 list revealed that their revenue was above average expectations, but in fact, the S&P500 broad market index futures seemed to come closer to the lower part of its trading range of the previous two weeks. 

The U.S. coronavirus stimulus saga is still unravelling. The House speaker Nancy Pelosi has abandoned the 48-hour deadline she imposed herself for a deal with Treasury Secretary Steven Mnuchin, so that a Democratic camp will continue to negotiate. Pelosi, speaking to Bloomberg News, said the two “are on a path” to a bipartisan deal and that it didn’t have to happen by Tuesday. One of the California Democrats told reporters on Tuesday evening that the two sides are still working on a pre-election deal. Deputy chief of staff Drew Hammill said Pelosi and Mnuchin spoke for another 53 minutes by phone and the talks “provided more clarity and common ground as they moved closer to an agreement.” So, they have planned for another call, or personal meeting, on Wednesday. But, of course, that is another probable cause for the market to be rather tense. 

As for the election campaign, there is no essential news. It would be rather interesting to know whether the story with the found laptop would have at least some continuation, after Mr Trump's lawyer and friend Rudy Giuliani said on Tuesday that he shared alleged sexually explicit materials involving underage girls from the presidential nominee’s son Hunter Biden with police in Delaware. "There's a text message to [Hunter's] father in which he says the following, and he's discussing his sister-in-law, who, for quite some time, was his lover," Giuliani told Newsmax, setting up the background of the exchange. "He says, 'She told my therapist that I was sexually inappropriate.' This would be with an unnamed, 14-year-old girl," the Washington Examiner wroteadding that neither Biden’s campaign nor Hunter Biden has denied any other element of the emails story, which, up until now, had only shed light on the younger Biden's foreign business ventures and struggle with drugs, though the former vice president has called it part of a "smear campaign." However, this topic may come up again in the face-to-face debate of both rivals on Thursday night. 

Meanwhile, the sitting U.S. President Donald Trump yesterday said during his Pennsylvania rally that the coronavirus pandemic would be about to end soon and that people are ready to get back to "normal life." "You know what we want? Normal life," Trump said to applause. "Normal life will finally resume, and next year will be the greatest economic year in the history of our country." He also said that American voters have a choice between two vastly different economic outcomes depending on who they select at the ballot box - him or former Vice President Joe Biden. "This is an election between the Trump super recovery, which is happening right now, and a Biden depression," Trump said. "If he gets elected, you're going to have a depression the likes of which you have never seen." 

That is just Donald Trump’s opinion, of course. As to the point of view of the market community, strategists at HSBC believe that Trump's victory would be positive for U.S. domestic stocks, the energy sector and high yield bonds while Biden's victory could be more positive for European stocks and green investment themes. In one likely scenario, Biden’s victory may come with a split Congress, is expected to bring about a small negative impact for markets, although a short-term one. HSBC analysts wrote: "Biden is an advocate for higher taxes and greater regulation of key sectors like technology so markets may react negatively immediately. But fiscal stimulus may also increase, boosting the economy and helping markets recover. Moreover, if Republicans keep control of the Senate, the Congress may not approve many of Biden’s current proposals. This ‘gridlock’ could ironically be good for markets in the months following the U.S. elections since Biden’s planned changes to the tax and regulatory environment would be more restricted and markets can focus instead on a strengthening economy supported by fiscal and monetary measures.” 

In case of a possible Democratic "clean sweep", which means a Biden Presidency with a Democrat-controlled Congress, the effect would initially be negative for financial markets, but they could soon rebound, after an initial bout of volatility, "if spending is raised to stimulate the economy.” But, the best scenario for the markets, according to HSBC, would be “Status quo: victory for President Trump, with a split Congress." In this scenario, everything remains the same, and this would be probably the most positive outcome for financial investors, simply because "it provides the most continuity and clarity around policy.”

 

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