Bassanese Bites: Biden time – October 12 2020

Global markets

Global equities enjoyed their second successive positive week, suggesting the ‘correction we had to have’ may well be over. The main market driver last week was the on again/off again/on again U.S. fiscal stimulus talks. After earlier hopes of a deal were quashed by Trump, he ended the week arguing he now wants an even bigger stimulus than the Democrats were proposing! Bond yields edged higher and the $US weakened, with the latter giving gold a modest boost.

The other key news last week was polling suggesting Biden’s lead in the Presidential race has lengthened (Trump getting COVID-19 did not garner him many sympathy votes it seems, perhaps due to his more erratic than usual behaviour). While Biden poses a market risk in terms of potentially higher corporate taxes and/or regulation, Wall Street at this moment remains focused on the prospect of a big fiscal stimulus if a blue wave of Democrats hits Washington. The market is also viewing Biden’s big lead as reducing the risk of post-election court battles.

In terms of the week ahead, stimulus talks will obviously remain a focus. Ironically, however, it may be more a market positive if these talks drag on for weeks – even until after the Presidential election. As we saw with the U.S.-China trade deal saga last year, and Trump’s tax cut plans in 2017, the ongoing expectation of a positive event – a carrot dangling just ahead of investors – is often better than the event (or carrot) itself! Indeed, if Biden wins, a major new stimulus package might not eventuate until the new year – lots of time for the market to get really really excited.

Note also this week marks the start of the Q3 U.S. earnings reporting season. While the headline is negative – earnings are expected to decline by 20% on the same quarter of last year – the better news is that analysts have actually modestly upgraded earnings over the past few months. Indeed, Q2 earnings ended up better than feared and Q3 earnings have been revised up by 5% since end-June. As I pointed out in my latest Global Market Trends report, U.S. forward earnings have started to rise a little in recent months, as the market’s expectation for a solid 2021 rebound in earnings is still holding up.

Click to read the Full Report