Advisor Edge – Week Oct. 4

The markets are facing an already difficult year became even more challenging after President Trump tested positive for COVID-19, adding to the increasingly tumultuous political backdrop in the U.S., including action on another stimulus bill. These are likely to keep the markets anxious over the economy’s recovery given the tens of thousands of furloughs/layoffs in the pipeline with the expiration of CARES payroll support.

Concurrently, there is no want for uncertainty in Europe after regular Brexit talks ended without resolution on key issues, while the October 15 EU Summit looms. There are also concerns over the ECB’s potential shift to a symmetric and fixed inflation target to cement the low-for-longer stance. In Asia, the RBI’s policy decision highlights a thin week with China on holiday until Friday.

Included In This Week’s Report

• Key Index & Sector Trends – Determine which sectors or areas are trending up or down.
• Key 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.

·  President Trump’s hospitalization for coronavirus exacerbates uncertainties. If the situation worsens, we expect a dramatic drop in the markets. Trump’s return to the White House will alternatively cause the markets to stabilize and jump up.

·  Market vol elevated by U.S. election angst, worries over recovery, stimulus unknowns. Positive news of a deal will cause the markets to jump up, negative news will likely cause minor dips or have no effect. We think a deal is very possible soon.

·  U.S. slate has ISM services, JOLTS, Fedspeak from Chair Powell, FOMC minutes. An extremely positive or optimistic statement will likely cause the market to climb higher. Negative to neutral shouldn’t have too much of an effect on the markets.

·  Treasury auctions $110 bln in coupons with 3-, 10-, and 30-year maturities. Auction prices could cause the market to dip if there is run to safety and yield gets crushed.

·  RBA and RBI expected to leave policy unchanged; China on holiday through Thursday. We expect to see huge market swings if something causes a policy shift.

·  Brexit talks end without a breakthrough, can the two sides find a compromise? Are we there yet? A deal could be very good for both Europe and England. The pound is most likely to be the winner and expect a gain.

·  Eurozone data includes German manufacturing orders, production; PMIs. We expect negative numbers and a possible minor dip. A major miss of the numbers could cause a more serious drop in both the European and US markets.

·  UK final PMIs on services, construction, along with trade, and GDP. Similar to all the other data and reports coming out, we believe the markets are pricing in yoy negatives. A huge negative number or trend could cause a global drop in markets.

NORTH AMERICA

U.S. markets were in a tizzy last week amid election tumult even before news of President Trump’s positive virus test added to the chaos. And now it’s going to be a free-for-all in terms of what this latest turn of the screw does to the campaigns and the elevated noise in Washington with stimulus talks, the SCOTUS hearing, and the debates on the immediate horizon. Meanwhile, the economic data have generally surprised on the high side, including last Friday’s jobs report, notwithstanding the moderate headline gain. Treasuries had a strong safe haven bid to begin Friday’s session as equities tumbled, but it evaporated as the panicky tone abated on news President Trump’s symptoms were mild, and with Wall Street’s losses ebbing as investors held on to hopes for stimulus. Indeed, Speaker Pelosi suggested there could be an agreement, while also indicating relief for the airlines was “imminent.” The advent of this week’s $110 bln in coupon auctions also weighed. Treasury yields ended Friday a little cheaper. The wi 3-year rate was up 0.5 bps to 0.170%, though that would still tie the record low set in September. The wi 10-year was 1 bp higher at 0.695%, while the wi 30-year rose 2.5 bps to 1.485%. The Dow closed -0.5% weaker at 27,683 versus the session low of 27,382. The S&P 500 lost -0.7% to 3358 versus the intraday nadir of 3323. But the NASDAQ took a beating, dropping -2.2% to 11,075, though it hit 11,033 early. Meanwhile, the VIX spiked to 29.90 but has slipped to 27.18. It was in the low 20s in mid-August, and just over 30 in early September. The futures are over 30 through the rest of the year as the potential for a messy and contested election are priced in.

President Trump’s hospitalization Friday, and reports of several senators also contracting the coronavirus threatened to put the run up to the November 3 elections into turmoil, making a very uncertain backdrop in the run up to the elections, and leaving the markets to suffer the consequences. It’s not clear how the spread of the virus through the White House will impact the stimulus negotiations. There was some thinking it could bring the sides closer together, though it seems the Republicans remain very opposed to the $2 tln price tag. President Trump tweeted from the hospital, “Work together and get it done.” Several companies have begun furloughs with tens of thousands in the pipeline on the expiration of the CARES payroll support. Meanwhile, Senate Republicans have canceled work until October 19, but they could reconvene if there is a deal. Also Leader McConnell said that the SCOTUS confirmation hearings would begin as slated on October 12, with a vote before the elections. Chairman of the Judiciary Committee Graham said the standing rules of the Senate allow committees to convene regardless of whether the Senate is in session or note. Meanwhile, VP Pence is still slated to debate Senator Harris (Wednesday), but will be 12 feet apart.

A sparse offering of economic data in the U.S. will not shed additional light on a key question that is occupying the market, namely “is the recovery slowing?” The September employment report fanned fears that the economy is loosing a bit of steam, but solid internals suggest that is not the case. Indeed, the soft 661k headline gain was largely due to declines in government, while an upward revision to August left a two month gain that was close to expectations. This week’s highlight is the September ISM services report (Monday) where we’re forecasting a dip to 56.5 after dropping -1.2 points to 56.9 in August. We see the index retrenching a bit from the jump to 58.1 in July that was the highest since February 2019. The August JOLTS report is slated (Tuesday). The trade deficit (Tuesday) is expected to widen in August to to a 12-year high of -$67.0 bln from -$63.6 bln in July, with gains of 2.5% in exports and 3.3% in imports. We expect a 13k increase to 850k in initial jobless claims (Thursday) for the week of October 3 after a -36k drop to 837k in the week of the 26th. Wholesale inventories (Friday) are pegged at 0.5% in August, following a -0.1% (was -0.3%) decrease in July. Sales are estimated to rise 1.0%, after a 4.6% July pop.

There’s a lot from the Fed again this week, with two key events. Chair Powell will speak on the economic outlook at the annual NABE conference (Tuesday). Also, the FOMC minutes from the September 15, 16 meeting are on tap (Wednesday). Remember this meeting included the quarterly SEP and included the Framework provisions. The minutes will be scrutinized for information more insight on the shift to an average inflation target and whether there’s any specificity the policy that rates will remain accommodative until inflation has “risen to 2% and is on track to moderately exceed 2 percent for some time.” Other Fedspeakers this week include Evans, Bostick, Harker, Kaplan, Rosengren, Kashkari, and Williams.

Treasury supply is on tap with $110 bln in coupon auctions slated. The offerings include a $52 bln 3-year (Tuesday), boosted to a new record size versus the prior $50 bln peak set in September, a $35 bln 10-year reopening (Wednesday), and a $23 bln 30-year (Thursday), with the latter two reopenings and at unchanged volumes. Safe haven flows richened the notes early on, with the wi’s at lows of 0.150%, 0.650%, and 1.420%, respectively. But, they’ve all cheapened to 0.170%, 0.700%, and 1.485%. The 3-year would tie the record low from last month, while the other two maturities would be just off their all-time nadirs. The auctions could get a solid bid due to the many uncertainties, although expectations of a Biden win could limit demand as the Democrat agenda would likely mean a massive increase in spending and borrowing.

The earnings calendar is again thin: Monday is empty of results, Tuesday has Paychex, Wednesday is empty, Thursday has Delta Airlines and Domino’s Pizza while Friday has Infosys.

Canada’s September employment report (Friday) highlights the docket this week. We anticipate a 100.0k gain after the 245.8k gain in August. The unemployment rate is projected at 10.0% from 10.2%. The August trade report (Tuesday) is seen showing a -C$2.0 bln deficit from the -C$2.5 bln shortfall in July. Housing starts (Thursday) are expected to edge lower to 250.0k in September from 262.4k in August. Housing has been a winner of the pandemic economy, supported by a change in preferences and low mortgage rates. On Thursday, Bank of Canada Governor Macklem delivers a speech. The next announcement is on October 28, with no change expected to the current rate setting. Rising virus cases, notably in Quebec, have produced some downside risk for Q4 growth following what is shaping up to a massive 45% surge in Q3 GDP (q/q, saar) after the -38.7% plunge in Q2 that came amid widespread shutdowns..

ASIA

There is a very light regional calendar this week — China is on holiday through Thursday, though the September services PMI is scheduled to be released. Japan has August current account and August PCE figures. Elsewhere, a light mix of prices and trade are due. India’s RBI is expected to meet this week after postponing its meeting scheduled for last week. The Indian government failed to appoint three new members to the six-member MPC, forcing a postponement. Rates are seen steady at 4.00%. Also, the RBA is expected to leave rates unchanged at the all-time low of 0.25%, though there has been increasing speculation of the need for more easing, which has heightening talk of a downshift to 0.10% this week.

Japan August current account (Thursday) should see the surplus widen to JPY 1,900.0 bln from JPY 1,468.3 bln. The rate of contraction in PCE (Friday) is forecast slowing slightly to a -5.0% y/y pace in August from the -7.6% clip from July. Spending plunged on the coronavirus hit, with declines of -16.2% y/y in May and -11.1% y/y in April. China September services PMI (Thursday) is expected to improve to 54.5 after slipping -0.1 ticks to 54.0 in August, although it will be a fifth month in expansion. India’s RBI is expected to announce policy (Thursday) with rates seen unchanged at 4.00%. The bank eased by 40 bps in May to the current rate, after cutting by -75 bps to 4.40% in March. The year began with the rate at 5.15%. South Korea September CPI (Tuesday) is penciled in slowing to 0.4% y/y from 0.7%. August current account figures are due Thursday. Thailand September CPI (Monday) should remain unchanged at -0.5% y/y. Philippines September CPI (Tuesday) is seen steady at 2.4%, while the August trade deficit (Friday) should narrow to $1.0 bln from $1.8 bln.

Australia’s docket is headlined by the RBA’s meeting (Tuesday), expected to result in no change the current 0.25% rate setting. Increasing speculation that the bank will need to cut in the near term has introduced the possibility that they will cut to 0.10% this week. However, the government is projected to unveil new stimulus spending as part of the budget (Tuesday), seen as part of a coordinated push to support the economy. The central bank will likely want to see the details of the budget before pulling the trigger on another rate cut. The RBA’s Financial Stability report will be released Friday. Economic data has the August trade report (Tuesday) and August housing investment (Friday).

New Zealand’s calendar has little of note this week. At the last announcement, the RBNZ held the OCR at 0.25% and left the bond purchase program at NZ$100 bln, matching widespread expectations. The bank said policy will need to provide significant economic support for a long time to come. They are “prepared to provide additional stimulus,” which could include negative rates and/or direct lending to banks.

EUROPE

Eurozone: the ECB may not be ready to add additional stimulus measures, but officials clearly are concerned that the negative inflation rates, which are likely to stay with us for some months, could lastingly damage inflation expectations and thus lead to real deflation down the line, especially if virus developments weigh on demand once again. For now, that isn’t sufficient to trigger additional easing steps, but the various officials speaking this week, including Lagarde and chief economist Lane, probably will continue to flag an increasingly likely shift to a symmetric and fixed inflation target as part of the current strategic framework review. Like the FOMC, such a shift would strengthen the low-for-longer message and effectively commit the ECB to let inflation run above target for a while following the current period of underinflation.

ECB moves aside, Brexit talks remain in the headlines. Regular talks have ended without a breakthrough on key issues. There are now only 2 weeks left until the EU summit on October 15 and realistically the end of the month really is the last date that would ensure that any deal can move through the legislative process before the end of the transition period. Ironically, no news over the next two weeks could actually be a good sign, as it would mean that officials see sufficient common ground to let talks enter the “tunnel” or “submarine” stage, where high level officials thrash out final details away from press briefings and the immediate scrutiny of voters.

Data releases meanwhile are unlikely to really change the outlook. Final services and composite PMIs for September (Monday) are not expected to bring major revisions, with data highlighting that the services sector has already started to feel the impact of the renewed tightening of virus restrictions and quarantine measures following the spike in new infection numbers across Europe. Tourism, travel and the hospitality sector are suffering and the Eurozone Services PMI is signaling contraction after falling to just 47.6 in the preliminary reading. The Composite number is expected to be confirmed at 50.1 – which effectively points to stagnation, thanks to an ongoing improvement in manufacturing.

The rest of the data calendar this week is mainly backward looking and focuses on German releases for August, including production, trade and most importantly – manufacturing orders (Tuesday). The latter is expected to show another robust rise of 2.8% m/m (median 3.0%) in line with national survey data that shows a rebound in manufacturing demand not just in Germany, with exports coming back. This should also keep production and trade numbers underpinned and we are looking for a rise of 2.0% m/m in industrial production (Wednesday) and a widening of the sa trade surplus (Thursday) to EUR 20.1 bln.

U.K.: news that the UK Prime Minister Johnson and European Commission President von de Leyen will be holding a video call on Saturday was generally taken as positive. The call will mark the beginning of the end of the Brexit endgame, although an ongoing and evolving future relationship negotiation, including on trade, will likely continue long after the UK leaves the single market at year end. The UK government last month said that it will not finalise the details of its post-Brexit state aid regime — one of the sticking points — until next year, which presumably will affect the scope of negotiations now.

With political heavyweights now getting directly involved, we will find out over the next two weeks (into the EU’s October 15th-16th summit) what degree of compromise both sides are willing to make to reach their shared goal of tariff free, quota free trade. Johnson reportedly wants to persuade the EU to enter in “the tunnel” (known as “submarine” in EU parlance), which refers to a media blackout period, to allow the final phase of negotiation to be interrupted by media or other criticism. Von de Leyen rejected that this is happening, however. The EU position has been that this would only happen when compromise positions have been established, which has not happened yet, with fishing rights and EU level playing field rules, the latter of which includes the state aid issue, remaining sticking points.

These issues are political hot potatoes on both sides of the Channel. The BBC’s Europe editor, Kate Adler, says that EU diplomats are hoping that “guiding principles” in place of strict adherence to level playing field rules may be the route to compromise.

We expect a deal will be made, and now see a no-deal scenario as very unlikely, but see a ‘bare bones’ deal as probable (that could be upgraded over time). Even a free trade deal would increase friction and costs of trading between the EU and UK. The UK is also set to lose much of the benefit from the 40 trade agreements the EU has with global economies, which will take time (years) to fully replicate. The hit to net trade should feed a bear trend in the pound.

The UK calendar this week is highlighted by the final September PMI reports for services and construction, along with the September construction survey (Monday), along with August data for production, trade and GDP (Friday). With the preliminary PMI having already been digested by markets, and given the limited scope for revisions (the prelim reports were based on 85% of respondents input), and given the rear-view nature of the production, trade and monthly growth figures, alongside the preoccupation on Brexit and significant localized Covid lockdowns, there is little scope for much market impact.

Switzerland: The Swiss data calendar is quiet, featuring unemployment data.

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.

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