Week Ahead: what a Joe Biden victory looks like, and what to watch in the week ahead
What does a confirmed victory for Joe Biden look like? Some may say it looks good for stocks, futures in US markets opened higher on Sunday night, and the dollar fell as the market took stock of one of the most contentious elections in history. However, having a President elect confirmed is unlikely to move the dial for financial markets, in our view. Last week, financial markets embraced the uncertainty of US election recounts and did not seem to mind that there was no clear view of who would be president. The Dow Jones was up more than 6%, the S&P 500 was up more than 7% and the Nasdaq was up 9%. This begs the question, do financial markets care who is President, and if the answer is no, then what will drive financial markets in the weeks ahead?
Constrained Joe, a recipe for stock market success
US politics matter for financial markets, however, expectations of a blue wave of support for the Democrats quickly evaporated on Tuesday night as the Republicans did better than expected. The markets had to find another political theme to latch onto, this time the prospected of a divided White House and Congress, with the Democrats failing to take control of the Senate and just managing to keep control of the House, has helped to boost stocks. A division of power might suit financial market bulls. The surge higher in US and global stocks, and the drop in volatility appear to be on the back of the view that the more progressive element of the US Democratic party will not be able to enact all of the tax rises and regulations that they would like to and would have been able to do if there had been a blue wave. This is why we saw big wins last week for mighty tech stocks, Amazon’s stock price jumped back above $3,000 dollars per share as the results from recounts around the country trickled out. Apple also made gains of approx. 10% on the week.
Why stock market bulls don’t need fiscal stimulus
Ahead of this election, the market reaction was expected to hinge on a massive wave of fiscal stimulus from a Democratic government that wanted to spend big to boost the economy. The Republicans have been resistant to calls for further stimulus, and we expect it to remain this way. This is why the big reflation trade that was playing out this time last week, before most votes had actually been counted, was unwound at the end of last week. Construction companies, banks and consumer goods failed to do as well as the tech titans, as the prospect of generous government stimulus faded away. For example, JP Morgan’s initial gains after Tuesday’s election evaporated by the end of last week as the market priced in a smaller stimulus plan, and the prospect that the Federal Reserve would have to step in to support the US economy. This is bad news for banks as it could mean lower or negative interest rates which eat away at banking profits. Likewise, energy firms also took a hit. Halliburton, one of the world’s largest service providers to the energy industry, also came a cropper at the end of last week, dropping more than 2% on Friday. If you want to understand why markets are rallying, then it is as important to look at the stocks that aren’t doing so well, along with the stocks that are making gains. We expect this pattern to continue, with big tech, who may find that they will come under less scrutiny as long as the Democrats don’t take control of the Senate, continuing to do well.
Economy, economy, economy
Another reason for US stocks’ resilience in the face of potentially less fiscal stimulus, is the economy, stupid! ISM manufacturing and services surveys are doing well, US jobs growth continues to surprise on the upside, and inflation data released this week is likely to remain weak enough to justify more monetary stimulus from the Fed in the coming months. The prospect of further Fed action to make up for a potential lack of fiscal stimulus is weighing on the dollar, which has opened weak across the board. We expect a further decline in the dollar this week, although EUR/USD could start to look vulnerable the closer it gets to $1.20, it is currently trading just below $1.19.
Why UK economic data could surprise to the upside
Elsewhere, it is worth watching the UK economic data this week. GBP/USD has also opened the week higher and was up nearly 2% last week. If GBP/USD can break above $1.32, then $1.3360 – the high from September, will be in sight. Not even BOE stimulus at the top end of expectations at £150bn, announced last week, could knock GBP off course. This week UK economic data comes into focus, including jobs data and the Q3 GDP reading. Some analysts are concerned that jobs figures will start to deteriorate for last month, we think rubbish. For one, the furlough scheme was still running then, and also economic growth was likely to have grown by nearly 16% in Q3. While not totally reversing Q2’s historic decline, this is still an historic quarterly gain for the UK economy. With growth figures at this level it is hard to see employment falling sharply any time soon, especially since the furlough scheme has been extended through to March.
UK GDP is expected to come in at 15.8% for Q3, of more interest will be the GDP figure for the month of September, which is expected to come in at 2.9%, boosting the August figure of 2%. If analysts are underestimating UK growth, then the pound could be the main beneficiary, as it may put the brakes on any further stimulus hopes from the Bank of England. Although the UK is locked down again, we believe that retail sales are likely to remain robust, as low levels of unemployment, so far, and extra time to browse online, boosts our online sales and helps to push demand out to December. Thus, even with the second lockdown in the UK, we don’t think that will hurt consumer spending. BRC retail sales are due for release this week, and they are expected to show a decent rise of 8.4% for October. If we see a trifecta of better than expected data for the UK this week, then GBP could be the star of the FX world especially now that the USD is on the backfoot.
Earnings season and why the FTSE is at risk
Elsewhere, it’s also worth noting that Q3 earnings season has been better than expected, with 86% of the 89% of S&P 500 companies that have already announced earnings for last quarter beating expectations for EPS. If this continues, then Q3 2020 is set to be a record breaker for upside EPS surprises for US companies. In the UK earnings season is in full swing, although it may not all be good news with Land Securities, 3i, Burberry and WH Smith all reporting results for last quarter during the next few days. All of these companies have been hit hard by the global pandemic, the question is how quick they have been to respond, preserve cash and try to get sales growth from Asia where the impact of the pandemic is receding. Earnings are a big unknown for the UK this week, which is why we believe that the FTSE 100 could lag its global peers in the coming days.