ABS Report (Premium Edition) – Nov. 2nd 2020

Investors ran into a wall of worry last week and were left with nowhere to hide as uncertainties surged into the weekend. Stocks plunged ahead of the lofty event risk on Tuesday, U.S. election day. The record jump in virus cases further unnerved the markets. Even Treasuries were dumped in favor of cash. The outcome of the election for president, as well as Congressional results and especially the Senate, are pivotal for the markets given the very different agendas of the two candidates.

Also, this week is the October jobs report and an FOMC meeting. In Europe, virus developments will remain in focus while ECB Lagarde’s message about policy recalibration is digested. Concurrently, time for a Brexit is running out fast. Asia’s calendar is thin, but China’s PMIs will be of interest.

Looking at the S&P 500 chart above, we can see the S&P 500 about to break through support while the VIX is skyrocketing. This is a very bad sign for the equities and signals a strong BEAR trend. The primary driver is the election and unfortunately we may be stuck here for weeks until there is a clear winner of the Presidential election.

Opportunity – Investors should consider investing in gold, consumer staples, or defense stocks. ABS believes that these areas should weather possible political storms from a win from either political party. We remain very BULLISH on Gold at this time.

A Trump win will likely continue a Bullish market as a whole. The primary sector risk we see is technology. It is likely that there will be Congressional hearings and possible regulations of technology companies.

Given Biden’s statement against fossil fuels in the last debate, we strongly believe that many energy sector stocks, MLPS, and ETFs will take an immediate drop in price. In addition, health insurance and some pharmaceuticals companies could also go down. There may be a short play on renewable energy stocks and ETFs.

Included In This Week’s Report

• Key Index & Sector Trends – Determine which sectors or areas are trending up or down.
• Market Drivers – What will push up or down the markets.
• Global Market Analysis – Get a high-level picture of the US and global economy.
• Stocks to Watch – Key blue-chip and income stocks to watch.
• Economic Calendar – Find out what is happening this week.

·  Wall Street, Treasuries lose ground on election worries, virus woes, tech concerns 

·  U.S. calendar includes FOMC meeting, nonfarm payrolls, ISM, vehicle sales

·  Earnings slate remains very busy, tech shares under scrutiny after guidance warnings

·  Canada employment expected to rise 125.0k in Oct; Ivey PMI; BoC’ Macklem speaks

·  BoE likely to expand QE; RBA seen easing to 0.10%; Bank Negara expected steady

·  Europe contends with surging virus cases, more restrictions, Brexit negotiations

·  Eurozone PMIs, retail sales; German PMIs, manufacturing orders, production due

·  U.K. BoE considering more action, fiscal stimulus expected too, PMI data due

S&P 500 Sectors

NORTH AMERICA

U.S. markets are priced for a Democrat sweep, a “blue wave,” which would be expected to result in trillions in fiscal stimulus, along with an increased budget deficit and higher borrowing needs. However, with races tightening, a record number of mail-in ballots to be counted, results may not be known Tuesday night. That, and the potential for a contested election added to the already sky-high anxiety. Those realizations saw heavy profit-taking last week on both Wall Street and Treasuries. Sparking much of Friday’s big selloff, however, were warnings from the high tech darlings. Yet, bearish and choppy trading was seen through October. Indeed, the Dow was -4.5% lower on the month, with the S&P 500 off -2.77%, while the NASDAQ dropped -2.29%. Indeed, it was a second straight month of losses and the worst week for the S&P 500 and Dow since March. Longs bailed, looking to harvest profits in case of a change in tax policies. Treasuries were also pressured with the 30- and 10-year notes underperforming in a bear steepener. The 30-year cheapened over 20 bps to 1.659% on Friday (the highest since March) from 1.45% at the start of the month. And the 10-year rose 19 bps to 0.873% (highest since June) from 0.679%. Even the 2-year, contained by Fed policy, edged up to 0.155% from 0.129%.

This will be a momentous week in the U.S. with the elections finally here. But two other factors that would normally take top billing are on the docket, an FOMC meeting and the October nonfarm payroll report. In terms of data, all eyes will be on the employment data. We’re forecasting a 750k increase after gains of 661k in September, 1,489k in August, and 1,761k in July. We assume a 50k factory jobs increase, after a 66k September rise. The jobless rate should fall to 7.7% from 7.9% in September, versus a 14.7% peak in April. Also of interest is the ISM index (Monday), which is expected to tick up to 55.5 in October from 55.4 in September versus a 2-year high of 56.0 in August. The ISM-NMI index should ease to 57.0 from 57.8 in September and compares to a 17-month high of 58.1 in July and an 11-year low of 41.8 in April. We’ve seen a steady climb in producer sentiment through the available October surveys, as output is continuing to rise in the face of plunging inventories and rising sales, with limited headwinds from the delayed stimulus and continued virus outbreaks. Also, vehicle sales are expected to rise further to a 16.7 mln clip in October from 16.3 mln. Other data this week includes the ADP private payroll survey, initial jobless claims, and trade.

The FOMC meets (Wednesday, Thursday). Thankfully that outcome will be the least of the markets’ worries. The Fed has already indicated rates will be left near 0% for some time to come. And the gist of the FOMC minutes to the September meeting suggested policymakers are in wait-and-see mode, still working out the details on QE and forward guidance while monitoring the economy. The much better than expected 33.1% bounce in Q3 GDP will be viewed in the context of rising virus cases and resulting uncertainties on the economy through the rest of the year. There’s likely considerable disappointment over the lack of additional fiscal stimulus, but there’s little more the Fed can do. We do expect the policy statement and Chair Powell to reiterate the Fed stands ready to support the markets if they were to destabilize, but that’s about it. We don’t see any urgency to announcing any changes to QE, or forward guidance, or communication strategies.

The earnings calendar remains busy. Despite good earnings, disappointing forward guidance from the tech titans last week is sure to put the focus on technology earnings reports this week. Monday – PayPal, Estee Lauder, Mondelez, Waste Management, Westpac, SBA communications, Clorox, Williams Companies, Skyworks Solutions, Marathon Petroleum, FirstEnergy, CDW, Arista Networks, Ingersoll Rand, FMC, and Alliant Energy. Tuesday – Humana, Ferrari, Eaton, Emerson Electric, Thomson Reuters, Excelon, Johnson Controls, Sysco, WEC Energy, Eversource Energy, Prudential, McKesson, Wayfair, Fox Corp., Nomura, Warner Music, Grifols, and Icahn Enterprises. Wednesday – QUALCOMM, Total, Baidu, MetLife, Match, Allstate, Manulife Financial, American Water Works, Credit Suisse, ANSYS, Sun Life, Paycom, Deutsche Bank, Energy Transfer, Expedia, GoDaddy, and Zynga. Thursday – Alibaba, Toyota, T-Mobile, Bristol-Myers Squibb, Astrazeneca, Square, Zoetis, Becton, Dickinson, Duke Energy, Dominion Energy, Cigna, Uber, GM, Barrick Gold, Monster Beverage, Sempra Energy, Electronic Arts, Peloton, Ball Corp., Republic Services, Parker-Hannifin, AIG, Con Ed, Roku, PPL, EOG Resources, NatWest, Vulcan Materials, Incyte, Take-Two Interactive, Amcor, Discovery, Cardinal Health, BioMarin Pharma, DISH Network, Evergy, Liberty Media, CenterPoint Energy, Cable One, and Dun & Bradstreet. Friday- Berkshire Hathaway, Novo Nordisk, CVS, Enbridge, Hershey, Zimmer Bionet, Marriott, TELUS, Cheniere Energy, Magna , and Ventas.

Canada‘s calendar features employment (Friday), expected to rise 125.0k in October following the 378.2k gain in September. The unemployment rate is seen easing to 8.8% from 9.0%. The trade deficit is seen narrowing to -C$2.3 bln in September from -C$2.4 bln in August. The Ivey PMI for October is due Friday. BoC Governor Macklem provides introductory remarks to the John Kuszczak Memorial Lecture (Friday). Last week, the BoC said it expects to hold rates at 0.25% into 2023, which is when “economic slack is absorbed so that the 2% inflation target is sustainably achieved.” Meanwhile, the bank said it is “recalibrating” the QE program, shifting purchases toward longer term bonds in order to impact the borrowing costs that “are most important for households and businesses.” Total purchases will be gradually reduced to at least $4 bln per week. The Governing Council judged that the “QE program is providing at least as much monetary stimulus as before” the changes.

ASIA

This week’s calendar is dominated by inflation and PMI data, and a smatter of trade and retail sales reports. China has manufacturing and services PMI’s while Japan has its manufacturing PMI. Elsewhere, the usual mix of trade, prices, growth, and employment data are due. For Central banks, Malaysia’s Bank Negara meets, with rates seen on hold at 1.75%. Australia’s RBA meets as well and is expected to cut rates to 0.10% from 0.25%.

In China, the official measure, released Saturday, dipped to 51.4 from 51.5. Also, the non-manufacturing index rose to 56.2 from 55.9. Interestingly the weakness manufacturing largely resulted from the Golden Week holidays rather than a fundamental slippage in activity, while service sector activity picked up. Note that the regular holiday was extended one day by National Day. We’re forecasting similar results for the October Caixin/Markit data. The manufacturing PMI (Monday) is expected to slip to 52.0 from 53.0. We expect the services index (Thursday) to improve to 55.3 from 54.8. Japan October manufacturing PMI (Monday) is expected to improve to 48.0 from 47.7. This would mark the 18th straight month below the boom/bust 50.0 level. The country will be closed on Tuesday for Culture Day. Wednesday brings the October services PMI, and the BoJ will release minutes from its September 16-17 MPM. September PCE (Friday) is forecast to fall -10.0% y/y from -6.9% previously.

South Korea October trade (Monday) is expected to see the surplus narrow to $4.7 bln from $8.7 bln previously. October CPI (Tuesday) should cool a tick to 0.9% y/y from 1.0%. September current account figures are due Thursday. Taiwan October CPI (Thursday) is expected to warm to -0.2% from -0.6%. Indonesia October CPI (Monday) is expected unchanged at 1.4% y/y. Q3 GDP (Thursday) is expected to contract at a slightly slower -3.0% y/y clip versus the -5.3% pace seen in Q2. Hong Kong September retail sales (Monday) are forecast at a -12.0% y/y contraction rate from -13.1% on a value basis, and -12.5% y/y from -13.4% on a volume basis. Malaysia’s Bank Negara meets (Tuesday) though no changes to policy are expected, with rates steady at 1.75%. The rate was trimmed 25 bps to 1.75% in July and left at that level in September. The rate started the year at 3.00%. Thailand October CPI (Thursday) is estimated at -0.6% y/y from -0.7%. Singapore October PMI is due Tuesday, with September retail sales (Friday) expected to post a -4.0% y/y pace of decline versus -5.7% previously. Philippines September trade deficit (Wednesday) likely narrowed slightly to -$2.0 bln from -$2.1 bln. October CPI (Thursday) is penciled in at 2.2% y/y from 2.3%.

Australia’s calendar is highlighted by the RBA’s meeting (Tuesday), which is expected result in a rate cut to 0.10% from 0.25%. The move was foreshadowed by RBA speakers in October. The RBA releases its Statement on Monetary Policy (Friday), which will provide an updated growth and inflation estimates. The data calendar has retail sales (Wednesday), seen falling -2.0% in September after the -4.0% drop in August. The trade report (Thursday), is expected to show a widening in the surplus to A$4.0 bln in September from A$2.6bln in August. Building approvals are due Monday.

New Zealand’s employment report (Wednesday) is expected to reveal a -0.5% decline (q/q, sa) in Q3 after a -0.3% slide in Q2. The unemployment rate is projected at 5.3% from 4.0%. The next RBNZ meeting is on November 11. At the last meeting, the RBNZ indicated it is actively working on a negative rate stance.

EUROPE

Eurozone: After the excitement of last week’s data rush and the ECB meeting, the local calendar will get a bit calmer this week, with most numbers too backward-looking to alter the outlook. The U.S. election will likely dominate market attention, however, while in Europe virus developments will remain key after several nations have announced new restrictions. Concurrently, investors will continue to digest Lagarde’s message and ponder on what policy settings the ECB can and will recalibrate at the December meeting.

The time for a Brexit deal is also running out and if any agreement should have a chance to run smoothly through the legislative process an agreement should really be on the table by the end of the week. There was some positive noise on the progress in talks last week, but both sides still highlighted considerable differences, with level playing field rules, the governance of a deal and fisheries the main sticking points. We suspect that the EU has set up the latter as the area where it is willing to make the type of concession that the U.K. government can sell as a victory to the hardliners at home. On level playing field rules and governance, meanwhile, officials in Brussels will likely remain firm.

The data calendar looks pretty busy but is unlikely to provide any fresh insights. Final PMI readings will likely confirm that the services sector already started to feel the pain from the tightening of restrictions in October, while manufacturing is holding up thanks to a pick up in export demand. The split likely will get even more pronounced with November readings. We see the manufacturing PMI (Monday) confirmed at 54.4 and the services reading (Wednesday) at 46.2, which should leave the composite 49.4 – already signaling a slight contraction in economic activity.

In Germany, the production sector, in particular, has benefited from the recovery abroad and especially in countries such as China, and October PMI and Ifo indicators reported ongoing improvement in manufacturing, and against that background, we expect a robust rise in manufacturing orders (Thursday) of 2.0% m/m, while overall production (Friday) should start to show the strong rebound in orders over the summer and is seen rising 3.5% m/m. Still, Germany’s strong manufacturing sector is hardly a sufficiently broad indicator to judge overall Eurozone developments. On the contrary, a two-speed recovery across the Eurozone only adds to the ECB’s problems.

Other data releases include Eurozone retail sales and PPI inflation and there are a number of ECB speakers as well as the European Commission’s latest forecast updates. All of these should back the ECB’s gloomy assessment of the outlook and the decision to prepare another stimulus package.

U.K.: the UK government is considering implementing another national lockdown, or least another more restrictive tier of regional restrictions, while the BoE is widely expected to expand its QE program at its November policy review this week (announcing Thursday). This will be the third time since the Covid crisis started that the BoE has hit the monetary stimulus levers. A Reuters poll this week found a consensus forecast for another 100 bln pounds in asset purchases, which would lift the QE total to 845 bln pounds, and which would mark a doubling from the pre-Covid level. The BoE has also stated that it is considering going negative with the repo rate, which is currently at 0.1%, although policymakers have stressed this is just part of their contingency planning at this stage. As Reuters noted, the expected QE expansion will come alongside massive fiscal stimulus that is swelling the government’s budget deficit to 20% of GDP. Much of the stimulus has simply been payments to furloughed workers, so more a case of costly life support than stimulus in the traditional sense. Moody’s observed this month that the UK economy has this year experienced the biggest peak-to-trough contraction out of the G20 economies. On October 16th the agency cut its rating of UK sovereign debt to Aa3 from Aa2.

On the Brexit front, there is still no breakthrough on the key sticking points. The final deadline is understood to be mid November. As judged by the pound’s price action in recent weeks, markets are working on the thesis that the EU and UK will reach at least a narrow free trade deal. The UK currency was a big underperformer during the global lockdowns earlier in the year, and is again vulnerable should capital inflows be disrupted. The UK needs foreign capital inflows to offset outflows generated by the country’s large current account deficit.

The UK data calendar this week is quiet, highlighted by the final releases of the October PMI surveys.

Switzerland: The Swiss data calendar features October CPI (Tuesday). The median forecast is for a 0.6% y/y headline, up on the -0.8% rate seen in the month prior.

The Swiss currency lifted last week, with EUR-CHF establishing below 1.0700 by broad declines in the euro, which has been pulled lower by the lockdown of major economies and with the ECB leveling-up monetary accommodation. The ECB’s policy course is in effect supplementing the Swiss currency’s chronic firming bias by weakening the euro, with the EUR-CHF cross being a proxy of the franc’s trade-weighted exchange rate. The franc has a fundamental underpinning rooted in Switzerland’s strong balance of payments position, which features a large current account surplus to GDP. Switzerland also has the status of having the second-highest GDP per capita in the world. While the SNB implements a punishing -0.75% deposit rate, real interest rates are still lower in the U.S. than they are in Switzerland, which is mathematically bearish for the nominal USD-CHF exchange rate, all else equal (and albeit very modest). Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off large speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank stated at its last quarterly monetary policy review that the franc remains “highly valued” and said it is ready to “intervene more strongly in the foreign exchange market.”

AlphaBetaStock’s team is constantly looking for opportunities to invest in income or growth stocks. Our current list of stocks we are watching and their current trend is listed below. Please note, that a bullish trend does not necessarily mean buy nor does a bear trend mean sell because the financial advisor or investor’s strategy may overrule it. Actually, in some cases, we purchase stocks that are dipping or in a short term bear trend.

Calendar