Latest Insight On Whether US Stimulus Can Be Delivered Before The Election

Hi there, I'm Anthony Cheung and I'm the Head of Market Analysis here at Amplify Trading. Every weekday morning I'll deliver a fundamental rundown ahead of the European Open, but if you subscribe to the channel you'll also get content from the rest of the team. So let's begin. Okay, very good morning to you, it is Wednesday the 21st of October. Hope you're doing well. I'm just going to have a quick look around the markets from a fundamental perspective on what's happened from the close of Wall Street, the overnight Asia-Pacific session, and then what's our outlook for the day ahead. And overall, the general theme is still very much being derived from the ongoing negotiations on Capitol Hill in regards to the US fiscal stimulus package. And there's been some positive kind of steps forward, and overall then that's what's leading and contributing to the fact that Stock index futures are pointing higher at the moment. We've had a further downward movement in the dollar index, just as some of the optimism around that particular issue starts to increase as we get closer towards a potential deal. But I'll go on to what my thoughts are on that in a moment. So the dollar index then down around 0.3%. We've had a little bit of added selling pressure in the dollar as Europe has come into the market, which is a continuation of the overnight Asia-Pacific theme. So if you're looking at the major currency pairs here in EURUSD and sterling or cable futures in the top left, I wouldn't say this is so much to do with European or sterling Brexit-related news flow. This is all down to the greenback softening, the likes of the AUDUSD and other dollar currency pairs reacting in kind. That inverse relationship that we tended to see between the dollar movement and fluctuation and gold continues to remain in place, inverse at the moment. So the dollar weakens, gold's been somewhat supported. We're up about $6 there, trading at $1,921. So that explains that slightly non-traditional move that we're seeing, because with general optimism and equity markets being higher, normally we'd look for gold to be lower. But in recent weeks, that correlation has really broken down as a more of a flight to quality, to more of a dollar-related movement, as what's really underpinning movement in gold of late. Elsewhere then, as you probably as you probably would expect, the US 10-year is down. US yields are rising on the prospects of potentially more fiscal stimulus coming. We're down around 7 ticks. And just quickly, I was looking on a daily continuation of the T-note, so the US 10-year in the futures, and we have broken here in the overnight session quite a key technical level, which is around 138.23, which was, as you can see here, the low point initiated back at right at the beginning of July. We had a retest toward late August, also found support at the beginning of this month. And as you can see here, we've broken below there, and that's added a little bit of weight and further movement here to the downside that we've seen. And as you can look for those support points here, we have briefly dropped down to the lowest levels we've been trading in the US 10-year since really early June. Um, this coming of course irrespective of the fact that hospitalizations, COVID cases in America do continue to rise. Although that is an important story to monitor and remain vigilant about, at the moment short-term intraday markets are more responding to the stimulus discussions. Um, so let's get into it. Let's talk about what's been happening and gonna talk about the stimulus talks then, what's the latest. And don't forget as well, if you haven't already done so and you're watching this on YouTube, to subscribe to the channel. Really appreciate all of the engagement we've had of late. But looking at the stimulus side of things, House Speaker Nancy Pelosi said yesterday she's hopeful for a stimulus agreement this week, which would be crucial to getting a bill passed before November 3rd election. Pelosi and Mnuchin are moving closer to a stimulus deal and will speak again later today, according to her aide. Now, normal rules apply there. Generally speaking, there's no fixed time for that, but more likely to come in toward— if you're in London and Europe, the afternoon, if not, then the early hours of the evening. Senate Republicans remain a key roadblock though, according to press reports in Bloomberg, as many oppose a bill on the scale of what's now under negotiation. Majority Leader Mitch McConnell has warned the White House not to rush into an agreement before the election, according to a person familiar with the matter. So for me, how I would, I guess, summarize what's going on and what the potential next reactions in markets could be. Because I did— we have a private chat room here, Amplify Trading, and a number of the traders were asking me yesterday evening about were we going to get a deal as soon as last night. And even though I was out at the supermarket at the time checking these, these messages at like 7, half 7 in the evening, I could have already told them right there and there, the possibility of a deal last night is pretty much zero. Because for me, my interpretation of this, putting my kind of political hat on, so non-markets, is basically it's in both parties' interests to be seen to be making as much effort as possible trying to cut a deal. Definitely no one can walk away. And it's all being orchestrated very carefully because of the fact that we've got a US election looming in just around 2 weeks time. So, um, for me, it's all about making signals that it looks like you're the one making progress and the opposition's holding you up. But you definitely don't want to cut a deal because you don't want to give them a political win to anyone at this point in time. So concessions are probably very slow to come. It's just going to appear that they're posturing towards that being a potential outcome. So for me, I still don't see, uh, this stimulus coming before the election, but I still don't see anyone walking away from the talks, which means all the way up between now and November 3rd, I would say that the markets are likely to be supported by the notion that stimulus is coming. Because every time if the market starts to pull back on the premise that it isn't, I think they'll just start ramping up the, the potential for a deal to get done, albeit we know that that's probably not going to be the case. So for the moment, I think that will underpin and support prices. That doesn't mean though we might not see some volatility on the way between there and here and there. So that's my overall kind of take on, on that side of things. A few other things to be aware of which did break yesterday, if you weren't around, if you left after the European close, we did see some news, Reuters exclusive. And you know, this is one of the reasons why you have an analyst team like me, or you know, use a Squawk service. You know, the whole point about news dissemination is about having quite broad visibility across all the different news channels because Although a predominant amount of financial news does come from things like Bloomberg, actually having the ability to see all different sources allows you to capture then these more specific exclusives that tend to come out from time to time on different places, which means there is a news arbitrage in time between release here to release there. In this case, Reuters, and there was a little bit of time to get on this last night because of the fact that Reuters is very much a system adopted more in the UK and Europe than in the US. So timings-wise, when this dropped, uh, took a little bit of time to get around the market. But basically AstraZeneca and their vaccine trial in the US is expected to resume as early as this week after the US FDA completed its review of a serious illness, according to four sources close to the matter. Now the reason why this is quite important is because AstraZeneca's, um, drug was one of the front runners here for the vaccine amongst others that are currently in play, uh, but it was in the US where it'd been halted now for a couple of weeks, which was actually longer than initially anticipated. So, uh, that gave some like relief as well at the time when that came out. Aftermarket, so going in chronological order, we did have the release of Netflix, um, aftermarket close yesterday and their shares. Well, let's have a quick look in the aftermarket. They closed down about 5.6%. 7%. You can see an immediate hit to their share price, and they pretty much stayed just below $500, um, in the aftermarket trade. Now, what happened with Netflix? Well, they added 2.2 million paid subscribers globally in the third quarter. However, expectations were for 3.4 million, and as far as those subscriber numbers go, that's a pretty sizable miss on market expectations. A lot of streaming competition at the moment in the form of Disney AT&T, of course, they're being very aggressive at the moment, looking to pick up on some of the pandemic increased activity with people being at home more, uh, and so on and so forth. The other thing we've had as well, although we are going globally into more forms of restriction, there had been a period in recent weeks and months, of course, where live televised sport had recommenced. And obviously that is something which Netflix does not focus on, but their competitors, for example, do. And that was pulling away from some of that potential audience. Other things here, Netflix has warned investors that the sudden surge that was seen in new signups would fade in the latter half of the year as COVID restrictions, all being well, start to ease and people start to then not spend so much time at home and therefore consumption levels start to drop. And necessity, particularly for a consumer, if you're feeling the price kind of pressures on your day-to-day lifestyle, then it could be something tangible that you could cut in that respect. How surprising is that comment? I find it not surprising at all, but goes to show just how pumped up these types of stocks are on these types of, you know, they, they have these phenomenal burst in new subscriptions back in, you remember, March, April when the pandemic hit. I think for the, the market not to understand the fact that that's not going to be sustainable, I find hard to believe. But they're in You know, it doesn't matter about logic sometimes when you're trading these types of very volatile stocks, particularly those which are quite behavioral driven, uh, rather than always theoretical in that sense. From a single stock perspective, um, just sticking with the earnings theme, there's gonna be another big one after market of course tonight, that being Tesla. They always see very large price reaction typically in the aftermarket hours, so something to be aware of pre-market. Probably the bigger names being Verizon, uh, is one to, to be aware of. And then last night we also had the API oil inventory data. Of course, this is the kind of prelude to the DOE numbers we'll get this afternoon. And actually, we did see a downward move in WTI crude futures last night. If I just quickly go back to the charts here, this is the WTI crude price and the reaction that we had to the, the the crude oil inventories was lower. But as you can see, we've pretty much come back exactly to where we were trading. So if you eradicated any of that downward movement, again, the stimulus talks, the whole multi-asset movement from a correlation point of view, is— would be indicative of we're getting closer towards some deal. And that would help on the demand side of expectations and help prop up oil prices. Irrespective of the fact that short-term supply was obviously impacting investors' mindset last night because the crude number was a build of just over half a million. Expectations were for a draw of 2 million. So we'll recap those ahead of the DOE this afternoon. Moving elsewhere, what's the latest on Brexit? I found this quite interesting actually because, you know, part of what I in my role really enjoy at the moment is thinking about, you know, political strategy. And what I find quite interesting about that is you've got to think about kind of 2, 3, 4, 5 steps down the road, and also amongst all of those participants, what are the individual goals and objectives. So therefore you can kind of anticipate where you think negotiation, whether on Capitol Hill or in Brussels, might go. And what I thought was quite interesting here was I'll fill you in on a few details. Despite a second call between the chief negotiators yesterday ending in a stalemate, EU officials expect formal discussions to resume in the coming days before entering an intense period of legal drafting, i.e., these kind of tunnel talks as they're being referred to. They still expect a deal— this is the EU side— to be struck in mid-November. Again, remember, it's mid-November, mid-December are two of those kind of more I guess tentative soft deadlines where there's kind of EU summit type meetings happening and also parliamentary meetings and these types of things, which would still give time for then ratification before the end of transition, before the end of the year. Now, the European Commission president and also chief negotiator Barnier are reportedly trying to work out how to make it look like they're backing down to give Boris Johnson a victory. And I thought that was really interesting, and actually I very much believe is the case. What if you're going to be an effective EU negotiator? If you're going to be an effective negotiator, full stop, one of the main things I think that you need to understand in terms of that theory that, that would dictate the outcome of those events is understanding then your opposite or opposition's objective. What is their goal and what is their motivation? Because if you can strike a balance where you can make sure and you can work in a collaborative way so they achieve what they're after, even though you might not actually be giving them what they want. If you can make it appear that way, then it's a success. And this is exactly where we are. I truly do not believe that Boris Johnson wants a no-deal Brexit. I don't think anyone in the UK wants that, not to be compounded as well, particularly at the point— at this point point in time by the COVID situation would be the worst possible thing that could happen to our economy. But he's got a political mandate to fulfill. So if I was Europe, I know that fact. This isn't about playing this blind brinksmanship. I want to appease that point that he needs to facilitate in order for him to govern in power. So I need to make it appear that he's got a political win, even though we know that ultimately that's possibly not the case. So this is why, endpoint, I firmly believe that the deal will get done and the possibility, probability of a no-deal Brexit, I would still put at an incredibly small amount. And that does not mean that the pound still can't in future react negatively to Brexit developments, but ultimately the 11th-hour deal will get struck, in my opinion. So timing will be quite key, I guess, over that medium-term perspective. According to people familiar with their thinking, that could mean going out of their way— this is Europe— in terms of ways and means they could go about this, going out of their way to reassert that the UK is a sovereign equal to the EU, sending British negotiators to draft legal text to show they are serious about getting, getting an agreement, or agreeing to compromise on the thorny topics topic of state aid, something they've been unwilling to do so, so far. So again, behind closed doors, the rumor mill is already underway in Brussels that, look, we know what we've got to do to get these talks back up. We've just got to make Boris feel like he's made a small victory so that he can publicly say that, and then he appeases his political agenda for the time being. So again, hence the reason why Sterling is so uninterested in this latest impasse because of these exact reasons. I think everyone shares the type of view that I'm, that I'm talking about in terms of how markets are priced. All right, moving on. One thing is in the COVID situation in the UK, things are deteriorating. And I do think that this does carry certainly a tangible risk for how, you know, dollar aside on the short-term reactions we're seeing in terms of stimulus. Could be more of a near-term headache for Sterling. And that's because Britain recorded over 21,000 new cases of COVID-19 as of yesterday. Deaths are now at 241 within 28 days of a positive death test. That was compared to just 80 reported on Monday. So things are getting worse at the moment, and hence the reason why a large proportion of the UK is currently in a form of restrictions. And the latest being what we're looking at here is Manchester. Of course, the north is seeing the worst of the cases at the moment, and Manchester has imposed top-tier restrictions which include forced closures of pubs which do not serve food. An advisory not to travel in and out of the region has now been put into place. And this is despite— here, picture of the mayor of Manchester who's been adamant of not going into lockdown unless he secure some kind of furlough deal for workers because of the risk of large levels of unemployment in one of the UK's largest cities. That hasn't happened. The government has stepped in. But just goes to show though that this COVID situation in the UK and in the US— listening to a lot of the kind of medical experts yesterday— are anticipating things to get worse. The only thing is that's bubbling away in the background at the moment. The market's so focused on stimulus and election, I think this is a nasty shock perhaps coming in the, in the coming weeks post-election perhaps. Elsewhere then, Lagarde definitely paying heed to this in speeches yesterday. She is alongside Philip Lane, the chief economist, speaking later today, and that will be particularly interesting. That's mainly because of the fact that because of the dollar weakness, euro-dollar is up about 2 points already on the week And as we close in up towards the 1.19 handle, that starts to make European officials very apprehensive about strengthening euro in the context of a perhaps more shallow, slower type recovery because of new impulsive restrictions being put in mainland Europe because of the case numbers getting worse. And, and Lagarde certainly trying to convey that message at the moment, saying virus resurgence is a clear risk to the economy. So I'd be expecting seeing more dovish, downbeat type of comments coming out of those officials as they look to tame some of the recent appreciation of the EURUSD currency pair. A quick look then at the calendar. We've already had the UK CPI data come out this morning. The year-on-year figure came in— the core year-on-year was 1.3%, in line with expectations. The overall year— or month-on-month was 0.4% against 0.5, the year-on-year 0.5 as expected. So the UK data is not why sterling is up this morning. Sterling is up because the dollar's down, basically. How long that dollar weakness can persist and how long markets can remain hopeful of stimulus deal— I think we're going to go through this kind of seesaw pattern because honestly, I don't really think it's going to be forthcoming anytime soon. So we'll see how today plays out. But remember, Basically signs of, uh, not an immediate stimulus coming, negative, and vice versa as far as market pricing is concerned in the intraday environment. Going further forward then in terms of the afternoon, not a great deal coming out. Canada-focused data with inflation CPI metrics at 1:30 London time, and then DOE is coming out at 3:30. Of course, speakers, as I mentioned, Lagarde and Lane coming up shortly. This morning, the European morning, and then Lane speaking again this afternoon with Vöter, Fesmester speaking on monetary policy. So it could be one to watch out for at 3 PM this afternoon. So that is it, that's your briefing for this morning. Hope it was useful. I'll let you guys get on and I will see you same time tomorrow. Thanks very much.