Trading desk Notes for October 10, 2020Submitted by Polar Futures Group on October 9th, 2020
What’s been driving the strong “Risk On” market psychology since late September? We think the market is not only (increasingly) pricing out Trump but is also pricing out a “contested election.” The market is pricing in more (maybe much more) stimulus...either because Trump “pulls out all the stops” and Mnuchin/Pelosi do a deal (which the Senate probably won’t approve...the Senate’s primary focus will be the SCOTUS issues) or if there is no deal before the election then there will be huge Democratic debt financed stimulus after the election. Whatever happens...stimulus will happen.
What’s been the market reaction to the strong “risk on” market psychology?
Bond yields UP
All Major stock indices UP (DJ Transports at All Time Highs)
Broad commodity baskets UP
Gold & Silver UP
US Dollar DOWN against all major currencies
Virus status: continues to spread. More lock downs likely. No vaccine widely available. Any “official” announcement of an available/effective vaccine will spur more risk on momentum.
High frequency economic data: Recovery is losing momentum...job losses rising / reduced consumer spending = increasing urgency for more stimulus.
Politics: Nearly all polls show Biden will win election (24 days away) with a wide enough margin to reduce fears of a contested election...possibility of a Blue Wave sweep of House, Senate and White House.
Broad stock indices are rising in this environment but with lots of internal rotation. For instance, previous leaders like Big Tech are less bid (fears of Dem regulation) while “green” stocks (Dems love “green”) and emerging markets are aggressively bid ( EM up when USD down.) Stock indices are rising even though Dems are expected to raise taxes on corporations and wealthy individuals. Perhaps the market sees the “negative effect” of higher taxes being offset by more stimulus and a less belligerent foreign policy...which might spur more corporate capex (for instance, less corporate uncertainty caused by unpredictable tariff policies.)
Have we seen “the lows” in bond yields? Despite persistent deflationary pressures the prospect of massive debt financed government spending may push bond yields higher. The “bond vigilantes” who may have feared a Fed “cap” on bond yields may have already started to “test” the Fed...thinking that the Fed may “allow” bond yields to rise as a way to get the 2%+ inflation they want. But if the “risk on” sentiment collapses (for instance, a contested election leads to a constitutional crisis) expect bond yields and stocks to tumble.
This will be our last Trading Desk Notes posted to www.PolarFuturesGroup.com. Starting next week the Trading Desk Notes will be posted to www.VictorAdair.ca. We want to thank our many friends at Pi Financial for a wonderful 8 years together.
Best wishes to all our Canadian readers for a truly thankful Thanksgiving Weekend.
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