Fear spreads faster than the Virus

Expect market to remain jittery until more stimulus measures are forthcoming.

The resurgence of the virus in Europe and the US is not a surprise given that the policymakers have pretty much ignored the lessons that could have been learnt from the countries who have managed to curb the spread effectively. The market reaction is, though, given the inevitability of the trajectory.

Fear spreads faster than the virus. Expect market to remain jittery until more stimulus measures are forthcoming. The earnings report from tech giants Alphabet (GOOGL), Amazon.com (AMZN), Facebook (FB) and Apple (AAPL) later today could stem the tide of pessimism if strong. Otherwise, the ride could get wild.

TRADING PLAN

Gold & Silver — Strong support for Gold is at 1850–60. For silver, major support is at 21.80–90 but minor support at 23.50–60 broke as the weak stock market led to a flight to the USD. Caution is warranted as sentiment likely to remain weak as we count down to the US elections.

Key risks — Fears of further lockdowns due to the virus and worries about the US elections should keep the market on its toes. US yields edging higher despite the weak risk sentiment is a worry too.

WHAT HAPPENED YESTERDAY

Market Movements as of New York Close 28 Oct 2020

Safe-haven Dollar rose on Wednesday, pushing the EUR to one-week lows (1.1718), on news of lockdowns in Germany and France as coronavirus cases surged. Germany decided to shut bars and restaurants for a month and France prepared to tighten controls on movement as the pandemic surged across Europe and financial markets tumbled on fears of the likely cost of a second lockdown. The European Commission proposed a series of new measures to fight the pandemic in the European Union, calling the new spike in infections “alarming”.
S&P 500 dropped 3.5% on Wednesday, as heightened growth concerns exacerbated de-risking efforts and the recent negative momentum in the market. The Nasdaq Composite fell 3.7%, the Dow Jones Industrial Average fell 3.4%, and the Russell 2000 fell 3.0%.
The weakness started in the futures market after European markets opened to news that Germany and France were preparing renewed lockdown measures to curb the spread of the coronavirus. Germany’s DAX dropped 4.2% on Wednesday, versus a 3.0% decline in the Europe Stoxx 600.
The coronavirus path in the U.S. is tracking in the wrong direction, leaving investors worried that more cities and states could adopt similar measures. With a stimulus deal unlikely to come before the election to mitigate the financial difficulties many businesses and households are facing, the market presumably started to rethink future earnings growth.
Most Q3 earnings reports continued to exceed expectations, but the reactions remained disappointing. Granted, Microsoft (MSFT 202.68, -10.57, -5.0%) did guide revenue for its fiscal second quarter below consensus, and MasterCard (MA 291.38, -25.73, -8.1%) was one of the larger companies that missed expectations.
If that wasn’t enough to dampen sentiment, Pfizer (PFE 35.45, -1.98, -5.3%) delayed the release of its Phase 3 vaccine trial results, which were expected this week, and the CEOs of Alphabet (GOOG 1516.62, -87.64, -5.5%), Facebook (FB 267.67, -15.62, -5.5%), and Twitter (TWTR 48.56, -2.71, -5.3%) testified before the Senate Commerce Committee on Section 230 of the Communications Decency Act. (more on this in point below on U.S. Tech Hearing Becomes Political Showdown)

HEADLINES:

FRANCE & GERMANY THRUST INTO LOCKDOWN AS SECOND COVID-19 WAVE SWEEPS EUROPE

French President Emmanuel Macron and German Chancellor Angela Merkel ordered their countries back into lockdown on Wednesday, as a massive second wave of coronavirus infections threatened to overwhelm Europe before the winter.

“The virus is circulating at a speed that not even the most pessimistic forecasts had anticipated,” Macron said in a televised address. “Like all our neighbours, we are submerged by the sudden acceleration of the virus.”

“We are all in the same position: overrun by a second wave which we know will be harder, more deadly than the first,” he said. “I have decided that we need to return to the lockdown which stopped the virus.”

Under the new French measures which come into force on Friday, people will be required to stay in their homes except to buy essential goods, seek medical attention, or exercise for up to one hour a day. They will be permitted to go to work if their employer deems it impossible for them to do the job from home. Schools will stay open.

Germany will shut bars, restaurants and theatres from Nov. 2–30 under measures agreed between Merkel and heads of regional governments. Schools will stay open, and shops will be allowed to operate with strict limits on access.

In an effort to blunt the economic impact, Germany will set aside up to 10 billion euros ($12 billion) to partly reimburse companies for lost sales. Italy has set aside more than 5 billion euros.

Thematic Context:“Either Congress passes the bill, or the markets will force it out of their hands via a selloff. We maintain that any meaningful retracements (approx -10%) in Nasdaq can be bought.” — 9th Aug 2020
“As stimulus effects wane off due to the lack of motivation to expand the balance sheet at this point in time, mainstreet economic woes floats back to the forefront. In our opinion, nothing has changed on mainstreet, jobless rates have been as high during the risk rally as it is now, but without the wealth creation effect in markets, problems suddenly seem bigger. As we have been saying, either the government prints the money, or it will be forced out of their hands via magnification of social and economic woes.” — 24th Sep 2020

U.S. SENATE TECH HEARING BECOMES POLITICAL SHOWDOWN

A U.S. Senate hearing to reform an internet law and hold tech companies accountable for how they moderate content quickly turned into a political scuffle as lawmakers not only went after the companies but also attacked each other.

Lawmakers are split on ways to hold Big Tech accountable under Section 230 of the Communications Decency Act — which protects companies from liability over content posted by users but also lets the firms shape political discourse.

Republican lawmakers used most of their time during the hearing to accuse the companies of selective censorship against conservatives. Democrats primarily focused on insufficient action against misinformation that interferes with the election.

All three CEOs also agreed the companies should be held liable if the platforms act as a publisher but denied being the referees over political speech — a claim that angered some Republicans.

Senator Ted Cruz went after Twitter’s Jack Dorsey after the CEO said Twitter has no influence over elections.

“Who the hell elected you and put you in charge of what the media are allowed to report and what the American people are allowed to hear,” Cruz said, referring to the platform’s decision to block stories from the New York Post about the son of Democratic presidential candidate Joe Biden.

U.S. lawmakers are not the only ones pushing for reform. The European Union’s executive Commission is drafting a new Digital Services Act that, in addition to tackling market abuses by dominant platforms, would also address liability for harmful or illegal content. Competition Commissioner Margrethe Vestager is due to unveil her proposals on Dec. 2.

Thematic Context: The extreme polarization in politics is unravelling the state of crony capitalism and revolving doors that exists between powerful organizations, wall street and government. This puts tech in a precarious position because Biden is evidently harsher when it comes to anti-trust and Trump, a “moderate” on Big Tech, might be tipped over to be more aggressive against them given the treatment he received. This puts “Big Tech” in a potential lose-lose situation should either win. In addition, the way to get someone’s interest is to tell them that they “cannot read” something, this is inadvertently much more powerful marketing against Biden that increases the chances of contested election. — 19th Oct 2020
These days, Big Tech is synonymous with the “establishment” that the regulators are typically incentivised to resent. Breaking up Big Tech plays to the advantage of trying to stand up for the average American and standing up for small businesses regardless of how useful it is in practice. For comparison, the DoJ’s suit against Microsoft took almost 2 years, and when Microsoft was ruled as a monopoly in Nov 1999, (its shares had nearly tripled in that time) it subsequently went on to tumble 66% (from highs 59.97 to lows 20.12).- 21st Oct 2020

U.S. SUPREME COURT DENIES EXTENSION TO PENNSYLVANIA’S VOTE-BY-MAIL FLIGHT

The U.S. Supreme Court on Wednesday declined to quickly decide whether to block an extended deadline for receiving mail-in ballots in next Tuesday’s election in Pennsylvania, a state pivotal to President Donald Trump’s re-election chances.

The action by the justices — with their new colleague Amy Coney Barrett remaining on the sidelines — means a Sept. 17 ruling by Pennsylvania’s top court allowing mail-in ballots that are postmarked by Election Day and received up to three days later to be counted will remain in place for now.

Pennsylvania is being closely contested by Trump and his Democratic challenger Joe Biden. Trump won Pennsylvania in 2016 but is now trailing Biden there in many opinion polls.

On Monday, the conservative justices were in the majority when the Supreme Court on a 5–3 vote declined to extend mail-in voting deadlines sought by Democrats in Wisconsin.

DAY AHEAD

German Prelim CPI: Inflation in Germany has fallen off sharply. CPI has posted three straight declines, with a reading of -0.2%. We now await the September data.

ECB Rate Decision: The ECB is likely to maintain rates at 0.00%, so the focus will be on the rate statement and press conference with ECB President Christine Lagarde. Any discussion about deflation or the high value of the EUR could send it tumbling.

Bank of Japan Rate Decision: No change in policy is expected from the BoJ, which has stubbornly kept to an inflation target of 2 percent, which is well above current inflation levels.

Risk will continue to be driven by stimulus saga, U.S. politics & virus development.

Earnings: Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL), Facebook (FB), Spotify (SPOT), Twitter (TWTR)