Monday’s Bullseye: 5 October 2020

It has been a volatile few days in the markets and as we approached the weekend, the dollar was higher on the day but down on the week, while the major US indices and buck-denominated gold were holding in the positive territory for the week. Investors remained optimistic that a US government fiscal stimulus deal was likely in the coming weeks as they shrugged off news that Donald Trump has caught the coronavirus, and the uncertainty this brings. Investors also largely ignored rising infection rates, as cases continued to climb across large European cities and some other parts of the world. That said, lockdown fears did cause some shares, such as travel stocks, to come under renewed pressure while demand concerns hit oil prices, which looked set to end lower for the second week running. Meanwhile, Trump’s illness overshadowed a mixed US jobs report on Friday, which disappointed on the headline front as ‘only’ 661 thousand non-farm jobs were added into the economy last month compared with 900 thousand expected and an upwardly revised 1.489 million jobs the month before. However, the headline disappointed mainly because of a dip in government jobs, while the private sector created more employment than expected. The unemployment rate dropped unexpectedly sharply to 7.9% from 8.4%, but this was largely a reflection of more people dropping out of the labour force.  

Coronavirus, Donald Trump and stimulus hopes

The upcoming week will feature only a handful of scheduled macroeconomic events. But without a doubt, the main area of focus will be on the resurgent coronavirus and as investors try and figure out what Trump’s illness means for the upcoming election and the prospect of the stimulus package being signed.

The key concern for equity market participants is that while Trump is in self isolation, he will lose at least 10 days of campaigning at a critical moment as elections loom large, with polls and betting odds already suggesting Joe Biden is leading the race. The markets clearly want the business-friendly President to come out on top, even though the latest polls suggest he has fallen further behind.

According to the latest run of poll aggregator FiveThirtyEight, Biden’s chance of winning has increased to a record high of 80.1%. Meanwhile Trump’s absence will also add to the uncertainty in the run up to the elections next month, especially as he is in the high-risk category of patients.

But after a knee-jerk reaction, the markets recovered on Friday as investors reacted positively to Nancy Pelosi’s comments on stimulus, who indicated that a deal might be on the way after all. If there is more progress on this front, then expect the markets to push higher in the coming week.

Otherwise, it is difficult to see where the trigger for another rally will come from.

Indeed, the second wave of infections in Europe is getting stronger and needs to be monitored closely. The UK government said the “R” rate has increased to between 1.3 and 1.6, up from 1.2 and 1.5 last week. So, fears are growing that London might go in a lockdown if cases do not start dropping soon. In Netherlands, meanwhile, some 3,831 new coronavirus cases were reported on Friday in the biggest one-day increase on record. In Spain, Madrid and nine surrounding cities were expected to enter partial lockdown at 10 pm local time on Friday.

It looks like a growing number of major European cities are in the tipping point; any further sharp increases in new Covid-19 cases could see the reintroduction of lockdown measures. If that happens, growth concerns will come to the forefront again, potentially leading to falls in the equity prices
 
Brexit: significant differences remains

There were some conflicting headlines regarding to the latest round of Brexit talks this week. The long and short of it is that some progress has been made but significant differences still remain, with time fast running out. The EU's Michel Barnier said the latest round of negotiations saw some areas of progress but level playing field/state aid and fisheries are among a lot of open issues still and sees `persistent’, and ‘serious divergences' in Brexit talks. The UK’s chief Brexit negotiator David Frost added that the “gap between us is unfortunately very large” on fisheries. Mr Frost warned that without further realism and flexibility from the EU, it may become impossible to bridge those gaps. The EU-UK trade talks will continue in London in the week ahead, followed by another round of talks in Brussels the following week.

Outlook: Bleak

The upcoming presidential election, Brexit uncertainty and rising coronavirus cases means the road ahead will be bumpy for risk assets. It is very difficult to say which direction risk assets will be heading given these uncertainties. Without further stimulus, the markets look vulnerable.  Overall, I do think the best days of the bull trend in the equity markets are over and we will see more side-ways action leading up to the elections, as investors will unlikely be in the mood to take on too much risk given the potential for the business-friendly Trump losing. This implies that the dollar may also be going side-ways.

Economic calendar

The week ahead is very quiet in terms of macro data. Here are the data highlights:

Monday

South African Markets in focus

By Kearabilwe Nonyana

Our market keeps its strong links to the global markets. The local JSE TOP40 is set to close the week higher in line with other global markets as upbeat Chinese PMI data showed signs of recovery in the world 2^nd largest economy. Financials were leading the charge as Capitec released better than expected results. Banks have been tightening their lending criteria and have been provisioning for credit losses at the highest rate since the 2008 world financial crisis. With the SARB holding rates a week ago it may signal the bottoming out of the share prices of the financials.
 
The Week Ahead

Politics and Economics throughout history have always been intertwined this continues now. In South Africa, the National Prosecution Authority has been charging politicians and businessmen who were linked to state capture this signals to the market the level of no tolerance towards corruption. The Market also awaits the new economic recovery plan that will be tabled by Cyril Ramaphosa government in order to stimulate the economy. The market will be on the look out for the resolution of the stimulus plan by the US government, this stimulus will trickle down to increase demand.
The market remains at alleviated levels the question one needs to ask is how much more can the market be sustained by the record liquidity? In the president weekly newsletter, he was very adamant on of adding additional Electricity generation capacity of more than 30%. When the economic recovery plan being released the focus on the structural deficiencies of the country which are hindering economic growth. This bodes well for the USD/ZAR in the long term the balance of probability and the path of least resistance would be for the strengthening of the Rand.
 
Corporate Action