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Written by: Edward Moya | OANDA
Trump’s Last Stand, VP Debate, COVID cases, Minutes show Fed firmly in wait-and-see mode, Oil slumps, Gold steadies
Financial markets continue to focus on the coronavirus spread, the presidential election, and fiscal stimulus. You can't talk about one without the other two. In the US cases continue to rise across most of the country. At the risk of sounding like a broken record, the polls are strongly in Biden’s favor and Wall Street is fully preparing for a Biden presidency. Before COVID-19, President Trump was a lock for re-election, but now his numbers are terrible and have been dropping in every single state. Today, the Quinnipiac poll in Florida, Pennsylvania, and Iowa showed Biden's lead widen to 11%, 13%, and 5% respectively. US stocks are focusing more on Biden's spending spree plans than his stances on taxes and regulation.
Stimulus
The aftermath of yesterday’s tweet that ended stimulus talks had harsh repercussions for President Trump. Trailing significantly in the polls, punishing the airlines and small businesses was not an optimal strategy going into November. No one is doubting the economy needs help, so yesterday’s halting of stimulus talks was poorly received by Americans. Trump’s flip-flop this morning allowed for stocks to bounce back as hopes for portions of a fiscal stimulus package grow. If President Trump wants Americans to be in a better position before Americans cast their ballot, he needs to capitulate to the Democrats. A piecemeal stimulus solution will not get the job done for him; he needs to agree to a stimulus package around $2 trillion. These stimulus talks could be Trump’s last stand.
VP Debate
Tonight, all eyes will be on Senator Kamala Harris, apologies VP Pence. Given Senator Harris’s past support for Medicare for All, she will try not to scare moderates that she will bring Biden closer to socialism. Harris will need to walkback some of her strong high-profile progressive proposals.
COVID
Health experts are growing concerned that the US is still seeing over 40,000 daily new cases, leaving the country’s healthcare system vulnerable if we see a surge. With 39 states headed in the wrong direction and a bulk load of the midwest states seeing a positivity rate above 5%, lockdowns and restrictive measures seem very likely. The economic recovery is in trouble and the pressure will grow for the government to do more.
Minutes
The Fed’s Minutes highlighted that the data points to a faster-than-expected recovery, noting that consumer spending was rebounding sharply and appeared to have recovered about three-fourths of its earlier decline. The Fed’s forecasts assumed more fiscal aid in 2020 and given the lack of action over the past few months, they seem to have good reason to assess their bond purchases in the coming meetings.
The Fed noted the possibility of additional virus outbreaks that could undermine the recovery, which likely means that we will live in a world of stimulus all next year. The minutes revealed that forward guidance doesn’t represent an unconditional commitment, so we should probably write in pencil that we will see no change in rates until at least 2023.
If the economy gets a $5 trillion new spending boost and has a couple of successful vaccines available for the masses by the middle of next year, the economic recovery would warrant a couple rate hikes. The uncertainty to the outlook is bigger than ever, but with the virus spreading strongly across America, even before the potential winter wave, investors should not expect the Fed to stand idle once the election has passed.
Oil
Crude prices remained heavy after the EIA crude oil inventory report showed its first build in four weeks. The report was not bearish despite the headline build of 501,000 barrels as the SPR saw another draw, this time of 644,000 barrels. The report did have many positives as gasoline stockpiles dropped below the five-year average for the first time since March. Crude production rose back above 11-million bpd, but that won’t last as Hurricane Delta will disrupt several offshore oil wells that account for 17% of the nation's crude production. The bad news was that US crude exports plummeted by over 800,000 bpd.
Oil prices were unable to shake off a surprise crude stock build and fiscal stimulus uncertainty.
Gold
Gold is dusting itself off after President Trump flip-flopped on fiscal relief and the Fed’s minutes did not indicate immediate action regarding balance sheet policy. The Fed will begin looking at some broader options (increase their purchases, operation twist, or more credit support) over the coming meetings, but will unlikely do anything until the end of the year.
Gold is stabilizing right now, and the path higher might take a while longer. Gold needs a stimulus catalyst and it seems unlikely that will happen before the election.