The week ahead: a new junction for risk and why the Asia-Pacific trade deal should not be feared
Over the weekend, news flow has generally provided some certainty about major world events that in non-Covid times would usually be greeted by an upswing in stocks and other risky assets at the start of the week. This may not be the case as we move into the second half of November. Donald Trump may have (almost) conceded in a tweet that Joe Biden won the election, there remains much optimism about further successful covid vaccine trials, Turkey is taking steps to recalibrate its economy and ditch nepotism in the central bank, and 15 Asia-Pacific nations have signed the biggest ever free trade deal. This leaves the market with four burning questions at the start of a new trading week.
1, Vaccine vs. rising coronavirus cases
This week will be important to determine whether last week’s market euphoria around a successful vaccine trial by Pfizer and BioNTech is set to continue, or if rising infection numbers and death rates, particularly in parts of Europe and the US will spook the markets once again. Last week’s markets clocked some of their best gains since the early summer, although the FTSE 100 took a stumble at the end of the week, largely due to the political turmoil in Downing Street and the ever decreasing deadline to reach a trade deal with the EU before the end of the year. This week we expect to get more positive results about a Covid vaccine from pharma giant Moderna, however the good news on the vaccine front has to be balanced with another 159,121 positive covid infections in the US on Saturday, and a grim total of 1,210 new deaths. This brings the death rate to more than 245,000, however, while this is a sombre moment for society, the market reaction will be based on the rate of increase in US infections. The average number of daily cases in the last week in the US has been 145,726 per day, which is an increase of 80% from the average of two weeks earlier. Whilst America and the Western world is undoubtedly facing a surge in infections this winter, it does not have to be as disastrous as the first wave early in 2020. Firstly, the growth in the death rate is slower than before, so even though the infection rate shows no sign of slowing, the overall impact of this second wave could be less horrific than the first. Second, although the mayors of Chicago and St Louis are limiting gatherings, there is no push for national or even state-wide US total lockdowns at this stage, which could protect the economy and help boost growth into Q4. Thirdly, there is a vaccine which could keep markets spirits high, an lastly, the Fed has said that it may need to add more monetary stimulus into the US economy, which could act as a buffer against any dip in market confidence as the Covid infection figures continue to rise. Thus, watch the markets at the start of this week. If they can eek out gains on Monday and Tuesday, then we may see that sentiment won’t nosedive like it did at the start of the first wave of coronavirus back in January through to mid-March.
2, Earnings season
Q3 earnings season has come to an end, and results were much better than expected. According to FactSet, 84% of companies on the S&P 500 had an EPS upside surprise and 78% beat earnings estimates. This is the largest share of EPS positive surprises since 2008. However, year over year declines in earnings were the largest they have been since 2009, at 7.1%. Added to this, analysts predict Q4 to see another decline in earnings, this time the average is expected to be a 10.8% drop. If we see more Covid lockdowns in the coming weeks then we would expect this expected decline to rise, particularly in the retail and travel and leisure space. Will that spook financial markets, or will they look to a brighter start in 2021, when a vaccine could be available for public use and analysts predict a big rise in earnings, with an average increase of 14.5% for Q1? We believe that optimism for the future recovery of corporate America’s earnings will be enough to support market sentiment and US share prices throughout the final quarter of the year. The S&P 500 remains above 3,585, we believe that any pullback at the start of this week could be bought into.
3, The pound
With the Brexit trade deal deadline looming and news on Sunday evening that Boris Johnson is isolating once again because of a potential exposure to someone who has tested positive for Covid, we expect sentiment to drain away from the pound at the start of this week. Couple that with a decent retail sales report for the US on Tuesday, anything over 0.7% MoM could boost the dollar, then GBP could struggle as we start a new week. GBP/USD has opened down a touch late on Sunday, however, if we see this pair drop below $1.3150 it opens the way to last week’s low at $1.3110, two levels that short-term traders should be aware of.
4, Asia-Pacific free trade deal
One of the largest free trade deals in history was signed by 15 Asia Pacific countries at the weekend. This is the first deal that brings together China, Japan and South Korea and it could add more than $200bn annually to the global economy. This is another reason why we believe that market sentiment could be sustained in the coming weeks, while much has been written about the shift of power from West to the East, that type of talk tends to stoke jingoism. If the East can boost its growth it will help the global economy as well as some western economies. A large-scale free trade agreement within Asia Pacific could boost the prospect of decent trade deals for the UK with other Asian nations once Brexit is complete at the end of this year. This comment may sound like a flippant one liner, the topic is too big to extrapolate on here, however, signs that China can adopt a western-style free trade agreement with some of its former political foes is progress for the world at large, even if China is accused of dominating the agreement. We could see some upside for the FTSE on the back of this agreement, although the impact could be moderate, as it is a concept that may be hard for the market to digest. But bear with us, this trade deal should not be feared, it should be celebrated.