While investors have warmed to the prospects of a potential win for Joe Biden as he retains what looks like a clear lead over Trump according to the latest polls, they are erring on the side of caution. The latest restrictions across many European cities pose great risk to the economic recovery, while deadlocked Brexit talks and ongoing stimulus negotiations in Washington provide additional worries for investors.
But the fact that the markets have managed to hold their own relatively well in the US, with the major indices being near record highs, suggests that investors are convinced that it is just a question of when rather than if the US stimulus package will be signed. Will it be before, or after the US election?
At the time of writing today, US stocks were trying to hang onto the positive territory, making back some of the losses from Monday. House Speaker Nancy Pelosi said differences were narrowing in stimulus negotiations, which has increased bets that the deal will be signed and sealed before the November 3 presidential election. Now that hopes are high again, so too is the potential for disappointment. If we hear any negative headlines, then expect the markets to drop again. Stimulus of any size above $1.8 trillion – which is what the White House has reportedly proposed – in coronavirus relief should be positive for the markets, and really positive if the deal is closer to the Democrat’s $2.2 trillion proposal.
While the two sides discuss the package, it is worth watching the S&P 500 closely here as we go deeper into one of the busiest weeks of the earnings season.
The index has now reached a critical area of support around 3429 and 3397, an area which was previously resistance, with the lower end of the range marking the pre-lockdown high:
Source: ThinkMarkets and TradingView.com
Mirroring the slight positivity, the dollar index has broken down again thanks largely to a rallying EUR/USD:
Source: ThinkMarkets and TradingView.com
With hopes over a stimulus deal rising and the S&P testing critical support, there is a good possibility we may see stocks push higher from here again, and the dollar lower.
However, if the above support levels break down and the index takes out its rising trend line, then at that point things would start looking bearish again.
BUT until that happens or something significantly bearish shows up at higher levels, then you will have to agree that the longer trend remains bullish and the path of least resistance to the upside, despite the recent weakness.