Last week was a good one for equity investors. The S&P 500 and Nasdaq Composite rallied 3.8% and 4.6% respectively with their best weekly performance since July. Despite the shortage of good economic news, hopes of passing a new stimulus package kept sentiment upbeat. However, the latest White House proposal was $400 billion short of the $2.2 trillion Democrats want and over the weekend there seems to be plenty of disagreement among politicians on both side of the aisle on the proposed offer, suggesting that Congress is unlikely to pass an economic relief package before election day. Headline havoc will continue to drive volatility, but investors are all but certain that whoever wins the election, a new bold fiscal package is on the way.
Sterling holds above 1.30
The Brexit story is nearing its end and with Sterling sitting above $1.30, most traders anticipate a happy ending. The European Council Summit on Thursday October 15 was intended to secure an agreement, and Boris Johnson warned earlier in the year that if a deal was not reached by then he would walk away from negotiations. There is now only three days left until the summit and unfortunately there is still a lot of agreement needed with the major obstacles being around fisheries, the internal market bill and state aid. Are we really close to a deal or are traders overly optimistic? From where Sterling is trading at present, it looks like the chance of a clean Brexit deal stand near 70%. So, the downside risk is much greater than the upside risk and it will be very interesting to see how things develop throughout this week.
US data to watch
Most data releases over the past three months have surprised to the upside, leading many market participants to believe we are already going through a V-shaped recovery. However, given the trajectory of the coronavirus infections, this recovery is now being called into question. US retail sales have hit record highs in the three months to August, but with the expiry of $600 in weekly unemployment benefit and no new fiscal stimulus package on the horizon, can the US consumers sustain their spending habits? We’ll get to find out on Friday.
Consumer prices which are due to be released on Tuesday will not have any material impact on the Dollar or equity prices, given that low inflation won’t surprise either the markets or the Federal Reserve. It will be more interesting to keep an eye on manufacturing surveys on Thursday and consumer sentiment on Friday. Those two figures along with retail sales will provide more clarity on the state of the American economy.
The earning season kicks off this week with big banks like JP Morgan and Citigroup due to release results. The third quarter still looks bad with markets expecting more than a 20% drop in earnings compared to last year. However, that is still better than the 30.6% drop in the previous quarter. Given that estimates have been on the rise over the past two months, the bar is set higher for companies to beat. We do not expect to see similar upside surprises compared to the second quarter, but forward guidance is going to be a major driver of equity prices.
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