10162020 :: Friday finance week in review
A partial digest of what we learned:
There is still no agreement within the political establishment of the United States over further stimulus measures or safety nets for the general public, industry, or the country’s municipalities and states. Republicans under McConnell won't go for a larger package, and Democrats under Pelosi won't go for a smaller one.
Hence, while everything hinges on fiscal stimulus, that now increasingly hinges on the election. In order to know where things are heading next, you'd have to know the outcome of the November contest. For reasons discussed last week, a so-called blue wave would be preferable to/for many.
That said, the concrete outcome of national elections in the US is yet unknown. Some traders are hedging the election itself, and any associated chaos, with Chinese securities and gold, for instance. Regarding gold, any bump in prices due to total disorder around the election cycle in the US is likely to be fleeting. Bets on China, however, offer a more interesting case.
China, for its part, continues to garner interest in its bonds and maintain a picture of relatively solid economic health. The nation has also been strengthening ties with other countries in the void left by Trump and his antagonistic policies.
At any rate, any election turmoil in the US must resolve itself eventually, but it is an open question how the country’s institutions, including its financial markets, will weather it. Diversification is always a good policy. This may include assets backed by the Fed such as corporate debt (LQD), equities of other countries such as China, and straddle strategies involving ETFs and/or options, in addition to plain vanilla holdings that will benefit from fiscal stimulus to come.
[tracking: SPY, VTI, QQQ, EDC, VWO, VXUS, LQD]
For the seventh week running, initial jobless claims exceeded 800k. Of considerable significance is that they reversed direction and went up this time, nearing 900k. The suspicion that the labor picture was going to worsen is being realized in the data. This does not bode well for the future of industries that have continued to hum along during the pandemic, including cars and housing.
Further job losses are in the making. Goldman Sachs highlighted the impact of “jumbo mergers” on the unemployment picture, while the accelerated push to automate will continue to displace labor lacking the relevant skills and training.
On a related note, Fortune argues that the real unemployment rate is much worse than officially stated, and it most certainly is, given how the official unemployment rate is calculated. Since the formula excludes those individuals not actively searching for work, it is ignoring a massive subsection of the population. A large percentage of this group is comprised of women who may have left the workforce to look after their children, given the way schooling is going in COVID times.
[tracking: SPY, VTI]
Retail sales in the US picked up for the month of Sept, though in some cases, sub types like apparel are seeing lower prices for their goods. The retail sector, like everything else, is heavily dependent on the election and further fiscal stimulus, as well as the employment picture improving and a turnaround in our handling of SARS-CoV-2.
[tracking: XRT]
Mortgage applications eased, with homebuyer applications declining more than refis. As banks have tightened lending standards during the pandemic, it is the opinion here that mortgage applications in the US will continue to fall, at least until the labor market improves.
[tracking: XLRE, NLY, VNO]
Banks in the US are expecting further coronavirus losses, but to what degree depends on the bank. After all is said and done, it seems likely that the banking sector will take longer to recover in terms of pre-pandemic stock valuations than other sectors, as in the wake of the ‘08 crisis.
[tracking: XLF]
Sovereign matters:
Europe looks to be re-entering lockdown mode once again, with France, Great Britain, the Netherlands, and several others announcing new restrictions.
Moody's has downgraded the UK, citing deteriorating institutions and governance, as well as fading economic and fiscal strength. Meanwhile, Johnson has urged all UK businesses to prepare for a no-deal Brexit.
S&P has downgraded Oman, indicating that the country’s public sector finances are set to deteriorate over the next few years.
The ratings company has also warned that there is a second wave of its own coming in sovereign credit downgrades that will not leave even the most “developed/advanced” nations untouched.
Fitch has cut Chile’s credit rating as the government is under pressure to increase social spending. This, in addition to the damage done by the coronavirus pandemic, is seen to weaken public finances.
Bulgaria was upgraded by Moody’s, on account of things like its entry into the eurozone and its low foreign currency risk with regards to government debt, which is largely denominated in euros (soon to become its predominant currency at home).
Canada's jobless rate saw a large drop to 9% as the labor picture improved.
China’s (and the globe’s) largest test of a digital currency recently was a success. This appears to position the country at the head of the pack in the widescale adoption of virtual money.
BlackRock is bearish on emerging markets, citing ignorance among country leaders about restructuring debt and flip-flopping governments exacerbating trust issues, among other things. However, the rest of the world is working on how to help the globe's economically poorest nations through a “looming” debt crisis, including debt forgiveness and additional aid.
Moreover, keep in mind that many emerging markets ETFs are weighted towards China and other high-flyers. This should help support fund valuations moving forward.
[tracking: EDC, VXUS, VWO]
Pfizer is attempting to be first to release a coronavirus vaccine in the US. Pfizer’s CEO Albert Bourla wrote on the company’s website,
Let me be clear, assuming positive data, Pfizer will apply for emergency authorization use in the U.S. soon after the safety milestone is achieved.¹
As we speak, the United States is losing an average of 401 people per day to causes strictly classified as "pneumonia" on their death certificates, with no acknowledgement of COVID-19.
Footnotes
¹ Kresge, Naomi, Robert Langreth, and Emma Court. “Pfizer Targeting Late November for Covid Vaccine Application.” Bloomberg (October 16, 2020).