EU stocks gave up some of their earlier gains by midday in London, after a positive start on the back of fresh optimism about progress on US stimulus and Brexit talks. The sluggish performance suggest investors are tired of false hopes and want to see some solid action rather than just empty promises, especially with virus restrictions having been tightened across many countries and pose a great risk to the economic recovery. Yet at the same time, bearish speculators are not too keen to apply the pressure just yet as they have learnt that all it takes is a tweet or two from Trump to send the markets surging higher. What’s more, US bank earnings have been decent and as we enter a
busy week for tech earnings, the potential is there to see more forecast-beating earnings to keep the rally for the major indices going. Providing additional “risk-on” signal is the rallying Chinese yuan (see below) as investors hope the world’s second largest recovery can lead a global recovery.
Stimulus hopes alive
Nancy Pelosi at the weekend said she was willing to consider a stimulus package before the election. But the House Speaker warned that the negotiations must be done by Tuesday, else any deal will have to wait until after the election. President Donald Trump has also said he would now support a bigger package and is willing to push Republicans in the Senate to support it.
Trump is doing all he can to close the gap in the polls. So, he will push for a deal, meaning we could, after all, get a larger fiscal package than what the Republicans originally wanted. With the time being so short however, both parties will need to bridge significant gaps on key issues and do so quickly. This means that there is also good chance that a compromise may not be agreed upon until after the election, especially as any large stimulus is likely to face stiff resistance in the Republican-controlled Senate.
Either, way, investors know that a potentially large programme of government is spending in likely to be announced – it will just be a matter of time. This explains why the markets are so calm with just two weeks to go until the election.
Disappointing Chinese GDP offset by cheerful up-to-date data
The Chinese yuan extended its recent gains, causing the USD/CNH to drop to its lowest levels since March 2019 and providing an additional “risk-on” signal for the wider financial markets. Although the latest GDP figures failed to meet expectations, the more up-to-date data on retail sales and industrial production both came in better than expected, lifting concerns over the slowing pace of the recovery. China’s economic output expanded in the third quarter by a year-over-year rate of 4.9%, which was noticeably weaker than the 5.5% expected and in line with the weakening of macro data across the globe. However, while recovery momentum may have slowed down in Q3, the final month of the quarter was presumably better. Retail sales jumped 3.3% year-over-year in September, easily beating expectations of 1.7%, while industrial production expanded by 6.9%, which was more than 1 percentage point above expectations (5.8%).
It is important to note that risk assets have tracked the movements in the USD/CNH closely. With the yuan providing a strong "risk-on" signal, the fact that it continues to make lower lows and lower highs is another bullish signal for the wider markets. The USD/CNH looks set to take out the 2019 low next:
Source: ThinkMarkets and TradingView.com
Fedspeak and earnings coming up
Fed Chair Jerome Powell made an interesting comment earlier, saying the central bank is evaluating the benefits of a digital currency. Although it has not decided to issue one, the fact that they are considering it means we could see digital dollars at some point in the future. Powell didn’t say anything new or interesting about what matters for the wider financial markets, namely more stimulus. There are more Fed speakers later, while ECB President Christine Lagarde and chief economist Philip Lane will also be delivering speeches later. Haliburton and IBM are among the companies reporting their results.