Downtown Express Train

Downtown express train.  Stocks took a beating yesterday on news that new lockdowns will be initiated across Europe.  There were few places to hide in yesterday’s collapse with all sectors ending the session in the red.

 

N O T E W O R T H Y

 

Cases up, stocks down.  Well, we all knew that it was bound to happen… some of us at least. COVID cases have surged in what many are calling the “third wave”. Cases in the US have actually been rising for some time, and though markets are off their early September highs, the ramp-up in cases was largely back-burnered by traders, who chose instead to focus on election results, price multiples, and economic stimulus. In the EU, cases have ramped up aggressively in the past few weeks, reaching new highs in some countries and prompting officials to act.  The hints of lockdowns began earlier in the week following last weekend’s reports and hints turned into policy yesterday as both France and Germany announced month-long lockdowns.  The announcements were a principal factor in yesterday’s stock selloff in Europe and the US.  So, not surprisingly, the real driver for stock selling is not necessarily cases or even deaths, but rather the economic impacts of new lockdowns.  Cold, indeed, but it is after all, Wall Street, the high temple of animal spirits and capitalism.  The tagline should really read “lockdowns up, stocks down”.  The sort-of-good news is that lockdown 2.0 is a bit different than the ones we experienced earlier in the pandemic.  These new lockdowns are more targeted and time-limited.  We have learned that lockdowns are effective in curbing further surges so, assuming no new hiccups, recovery in those countries, should resume… in a month. Another interesting sign, which I first pointed out earlier this week is in the bond market.  Bonds ordinarily rise when stocks sell off and that has not been the case with the recent selling.  Longer maturity yields were virtually unchanged yesterday and they have remained in range which is higher than in the prior month. This can be interpreted as a sign that bond traders are holding on to the recovery/rising inflation scenario.

 

Refined tastes.  The energy sector has not had an easy go of things in the past 12 months.  In fact, it has been a rough ride for the sector for the past few years and crude oil prices have never fully recovered since their initial downturn in 2015.  Many have attributed the price declines to increases in supply.  OPEC once tightly controlled supply which, in effect, controlled prices.  After the Great Recession, the explosive growth of fracking in the US not only supplied much needed jobs, but also lots and lots of supply. OPEC’s grip on global supply began to slip, which has been further exacerbated by OPEC members not complying with the supply curbs which would normally cause prices to rise. However, the dynamic in the energy sector appears to be shifting, and it may not be a good sign for producers.  In the past 18 months we have witnessed a significant decrease in demand for products which first coincided with the US-China trade war and ultimately with the pandemic.  But, in fact, demand has been in a more secular downtrend as alternative energy sources and ESG-awareness increases.  Just yesterday PBF announced that it was closing down its Paulsboro, NJ refinery, making it the first East Coast shuttering.  The NJ closing joins 6 others which have closed in recent months and analysts expect more to follow.

 

Tea leaves for two.  In case you have been stuck on some desert island without media, elections are but days away.  In fact, many have already cast their votes, eager to have their voices heard in what is possibly the most contentious, and um… interesting election in modern times.  As with all elections there are loads and loads of folks who have logged their predictions on a would-be victor.  Some rely on polls, others on complex models, and still others are just passionate… really passionate about their candidate, relying on lawn signs, tee-shirts, and truck-mounted flags to make their hopes a reality.  But what about the markets, what do they predict?  Well, let’s start with yesterday’s dip, which left the S&P500 off by -3.52%.  Since 1932, the S&P has only fallen by -3% or more 2 times in the 6 days prior to an election.  Those two occurrences saw losses for the incumbents.  Some more research shows that, since 1928, the performance of the S&P in the 3 months prior to an election has correctly predicted the election winner 20 out of 23 times.  That gauge is not too encouraging for the incumbent party, either.  But, there are still a few trading days left, and more importantly… these are not ordinary times.

 

THE MARKETS

 

Stocks logged a big loss yesterday on news that some EU countries will undergo a month of lockdown to fight surges in virus cases.  Yesterday marked the 15th session in which the Dow Jones lost more than -3%, the largest tally since 1933.  The S&P500 sold off by -3.43%, the Dow Jones Industrial Average dropped by -3.43%, the Russell 2000 Index gave up -2.97%, and the Nasdaq Composite Index fell by -3.73%.  Bonds slipped slightly as well and 10-year treasury yields added +1 basis point to 0.77%.

 

NXT UP

 

– Initial Jobless Claims (Oct 24) are expected to have fallen to +770k from 787k, though the whisper number is higher.

– Continuing Jobless Claims (Oct 17) are expected to be 7.775 million compared to the prior week’s 8.373 million.

– GDP Annualized QoQ (Q3) may have shown a growth of +32.0% compared to last quarter’s -31.4% drop.

– Pending Home Sales (Sept) are expected to have grown by +3.0%, slower than last month’s +8.8% rise.

– This morning DuPont, Dunkin’, IDEXX Labs, Alexion Pharma, BorgWarner, Carrier Global, Brunswick, Keurig Dr Pepper, Martin Marietta Materials, Yum! Brands, Moody’s, Molson Coors, and American Tower beat estimates while Moderna missed. Still reporting before the bell will be Newmont, ConocoPhillips, At Home, Overstock.com, International Paper, Comcast, Kraft-Heinz, and Kellogg.  After the bell, we will hear from Twitter, Apple, Alphabet, Facebook, Amazon.com, Stryker, Archer-Daniels-Midland, Digital Realty Trust, MGM Resorts, Vertex Pharma, Activision Limited, Shake Shack, Cheesecake Factory, US Steel, LivePerson, Avis Budget Group, and Devon Energy.

 

 

daily chartbook 2020-10-29