Summary and Price Action Rundown
Global risk assets are extending their recent rally this morning as investors continue to pin their hopes on the prospects for more fiscal and monetary stimulus after the November election. S&P 500 futures point to a 0.5% higher open after the index advanced 0.8% yesterday, upping its year-to-date gain to 6.7%, which is 3.7% below early September’s record high. Equities in the EU and Asia were mixed overnight. As investors continue to assess the outlook for policy stimulus, the dollar is sinking lower while longer-dated Treasury yields are fluctuating near multi-month highs, with the 10-year yield at 0.77%. Brent crude prices remain choppy around $43 per barrel amid crosscurrents in the demand outlook and another Gulf hurricane.
Brightening Post-Election Stimulus Prospects Buoy Market Spirits
The strong likelihood of a pandemic relief deal after the election, and potentially a $3 trillion package in the event of a Democrat sweep of both houses of Congress and the White House, is supporting investor sentiment despite yesterday’s disappointment over airline stimulus. Yesterday, House Speaker Pelosi dampened expectations of near-term completion of a standalone relief deal for airlines after discussions with Treasury Secretary Mnuchin over recent days failed to bear fruit. In line with her previous negotiating position, she rejected even this limited foray into a piecemeal approach at stimulus, stating “there is no standalone bill without a bigger bill.” With the polls reflecting an increasingly lead for Joe Biden, analysts do not expect Speaker Pelosi to offer significant concessions to the White House on their current $2.2 trillion offer, though she indicated that she remains “at the table.” Meanwhile, the White House is signaling renewed appetite for a comprehensive deal, but there is no indication that they are set to up their offer in order to bridge the gap between their roughly $1.6 trillion position and the House Democrats’ higher figure, with the amount of state aid remaining a particular sticking point. Amid the wrangling over this round of stimulus, however, investors do not expect to have to wait long for a deal to pass. If President Trump secures a second term, House Democrats will likely make the necessary compromise to get a bill through before year-end and if Biden emerges victorious, he may sign a stimulus bill upwards of $3 trillion if Democrats capture the Senate as well (more below).
Tentative Ebbing of US Political Risk
With investors focused primarily on the risk of a narrow and disputed election result, leading to weeks or months of uncertainty amid recounts, litigation, and civic unrest, the widening lead for Biden over the past week is raising hopes for a clean and clear outcome. Despite widespread skepticism over the accuracy of polling, particularly in the wake of the high-profile failures to predict the outcomes of the 2016 US election and the Brexit vote, the now roughly double digit national lead for Biden and his narrower but consistent advantage in nearly every consequential swing state are affording investors a moderately greater degree of clarity going into polling. Indications from key House and Senate races raise the possibility of a Democrat sweep, which would yield a significantly more aggressive approach to fiscal stimulus, though analysts note promised tax increases on corporations and the wealthy as well as a more proactive overall regulatory environment under the Democrats as offsetting factors. Though the polls indicate a rising likelihood of a clear-cut election result, the political atmosphere remains tense and volatility futures continue to reflect expectations for elevated turbulence into and around the election date of November 3rd. News yesterday that President Trump is declining to participate in the upcoming second presidential debate due to its virtual format, alongside the worrisome developments in Michigan, are keeping the political temperature elevated.
Oil Prices Fluctuate as Another Hurricane Barrels Through the Gulf – Like Hurricane Laura in late August, Hurricane Delta is picking up strength as it approaches landfall on the gulf coast, requiring the shutdown of exposed energy facilities, like drilling rigs and refineries in its path. Category 4 Hurricane Laura, which was stronger than Delta is now at Category 3, spared the gulf energy infrastructure and resulted in only fleeting upside in oil prices. Despite the cloudy demand outlook and worsening supply dynamics, oil prices have remained broadly rangebound for months, with the weakening dollar providing key support.
Looking Ahead – Next week features a busy market calendar, with the unofficial start of third quarter (Q3) corporate earnings reporting season kicking off with US mega-banks on Tuesday. Companies have thus far offered scant insight into earnings expectations, with only 67 of the S&P 500 companies issuing any sort of guidance for the quarter (45 positive and 22 negative), which falls well below the five-year running average of 106 companies. On the upside, analysts have positively revised Q3 estimates from the beginning of the quarter, with earnings expected to decline by 21% and revenue by 3.6% compared to projections of -25.3% and -5.4%, respectively, on June 30th. US September retail sales and industrial production are also due, alongside inflation figures.