The Fed refuses to help Trump - at least for now
Now that autumn and lighter rules pave the way for a new wave of Covid 19 in the world, this only adds further silence to the mood in the United States.
Now that autumn and lighter rules pave the way for a new wave of Covid 19 in the world, this only adds further silence to the mood in the United States. Covid 19 has now killed 200,000 Americans, which is about three times as many as the entire Vietnam War harvested in form of US casualties. GDP is down by 20 percent, but after massive efforts by the central banks, the stock market index is only 2 percent below the level where Covid 19 hit the markets.
Globally, Covid 19 just passed one million deaths.
The US election is the second major theme that overshadows most things.
The democrats, led by Joe Biden, tried early to take advantage of the Black Lives Matter movement, but as the protests have become increasingly violent, support for this organization has diminished.
Previously, 53 percent of white Americans supported the BLM movement, but this has dropped to 34 percent now. Among blacks, support has decreased from 81 to 63 percent.
Democrats are increasingly turning away from this movement.
Another interesting debate in the coming weeks will be that President Trump has nominated Amy Coney Barrett as a new member of the Supreme Court. The choice of a woman with very strong merits for this position is a smart move. Democrats must push hard for her to be a Catholic and oppose abortion to have a chance of avoiding being nominated. It will be very interesting to see how this debate is reflected in the Swedish and other European media. For gender equality, the choice is excellent- but what weighs heaviest here; a relative young woman who can be elected to the most important position in the United States after the presidency, but a pronounced conservative person and nominated by Trump for her current position…
But the force that Trump needs to win the election is the Fed and they are doing everything they can to avoid acting for the moment. On the one hand, Fed chief Powell is certainly against Trump following the initial harsh treatment that Trump subjected him to and made him go from hawk to dove. But the main reason is, of course, that the Fed (rightly) does not want to be accused of controlling the election.
Underlying this, the economy seems to be on the rise. In our constant search for economic indicators that are not manipulated by the central banks, container manufacturers can be an excellent indicator.
The graph below shows the share development for Triton International, which is one of the world's largest manufacturers of containers. They testify that this is again a scarce commodity and that buyers are filling the order books with orders for February-March 2021 right now. This shows that consumption is on the way back. However, you should expect that the service and travel industry will face challenging times…
What has lifted the stock market is above all tech stocks, so it is mainly these you should keep an eye on. But without support purchases from the Fed paired with fiscal stimulus, we only believe in a more temporary bounce in the market.
Above you can see how investors turned in the door in just one week. From buying a record amount net, they swung and sold a record amount net the next week.
If we look at Fed´s support purchases, they are currently resting on their laurels. The large bond sales that are taking place in the United States are swallowed by the market without any problems. There are no signals that the foreign holdings will be dumped either.
Below, however, it can be seen how the Fed has reduced its support purchases of corporate bonds sharply.
HYG, which is an ETF for junk bonds, received a boost from the Fed´s support purchases, but just like the S&P 500, HYG is starting to lose momentum. This graph will be super exciting to follow as it will be one of the first to indicate whether the Fed will start buying to support the market if it falls too fast. Se HYG below:
In the options market, there is still a large difference in pricing for different contracts, where the market is pricing in increased volatility linked to election on 3 November. This is because President Trump clearly marks that it is not certain that he will leave the White House even if he loses the election (by a narrow majority). Just as we wrote in our last weekly letter, it will be the Supreme Court that makes the decision. Of course, Trump prefer one of his confidants in as soon as possible for the Conservatives to cement their majority.
The Q3 reporting season starts
Despite the fact that September is not quite over yet, 12 of companies included in the S&P500 index have already reported their figures for Q3 2020. Of these twelve, seven are in consumer goods (both staple goods and discretionary), three in information technology, while two are industrial companies. As can be seen below, most things look green, where the only profit disappointment is Accenture. About half of these reporting companies are large and well-known globally.
Earnings Fact Insight notes that only 67 of the 506 S&P500 companies have provided any profit guidance for Q3 2020. This is 36 percent below the five-year-average, although it is an increase compared with Q2 2020. Of the 67 companies that provided guidance prior to Q3 2020, only one third were negative. Most number of positive profit guidance have come from the IT sector, followed by health care with industry in third place. The IT sector also tops the league over negative profit guidance ahead of the Q3 reports.
The aggregated profits for S&P500 companies are expected to decrease by almost 22 percent in Q3 2020 (a figure that has been revised from minus 25 percent as of June 30). In terms of valuation, the S&P 500 index is now traded at a p/e-ratio of 21.7x.
Despite the positive picture with profit recovery, share prices have risen to a very high extent, while corporate profits have declined. The New York Stock Exchange is fundamentally overvalued (which it certainly is not alone in being, even if its leading). As is well known, the difference is spelled stimuli from the central banks.
The rapidly rising USD is otherwise said to have create a slight panic in the White House. A stronger USD creates a falling stock market and headwinds or declining quotes for all commodites including oil, gold, silver etc. The euro continues to fall, burdened by Covid 19, Brexit and European banks that are back in focus due to money laundering.
Below is the chart for the currency pair EUR/USD. As can be seen the pair is trading below Fibonacci 23.6. The next level on the downside can be found around 1.15 where Fibonacci 38.2 meet up:
If you should look at only one graph for the stock market, the Apple share is suitable. Note how the parabolic rise may have been broken. Apple has bounced twice on the support at Fibonacci 38.2 and is currently wrestling with MA50 and EMA9. In case of continued upwards movement, MA20 around 116.3 USD is the next level to be challenged:
Google (or Alphabet) trading all the way down to its MA200. RSI is at oversold levels. Can the share break up from here?
Nasdaq index has fallen below MA50. Note that momentum is negative but improving as the difference between the MACD-line and the signal-line is getting smaller. MA50 must be recovered to break the falling trend:
The same goes with the S&P500, except for that the positive sign in MACD is missing:
In the 2-hour graph below, one can see how the index has broken above the upper level of a bullish falling wedge-formation. The formation calls for further upside to the 3 415-level:
The DAX index is weighted and was intraday below MA100 during Friday. But during the end of the trading day, MA100 was recovered. A falling EMA9 and MA20 is putting downwards pressure on the index. MA200 acts as both a magnet and a support:
OMXS30 index is still trading above MA50 but is struggling. Note that momentum is positive but decreasing in strength. In case of a break below MA50 and the 1 770-leven, 1 725 and MA100 is next:
The gold price is pressured by a stronger USD and is currently trading right above support in the form of MA100 and Fibonacci 38.2. Note MACD that has generated a sell signal. The next level on the downside can be found around 1 765 USD per troy ounce, where Fibonacci 50 meet up:
Bitcoin managed to bounce on the rising trend line. It climbed up above MA20 and EMA9 that is now also rising. Resistance in form of a short falling trend line can be found around current trading. In case of the break to the upside, the next level is MA50 at 11 116:
This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.
The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.