Following three consecutive weekly advances, stocks declined modestly last week. The news flow was dominated by headlines around the negotiations for another round of fiscal relief from Washington before the election, which is fast approaching. The 10-year Treasury yield rose to the highest level in four months amid expectations that a potential Biden win would lead to a larger relief package to support the economy. Aside from the speculation about potential election outcomes and policies, economic data for the week was encouraging to the long-term outlook, showing an improvement in jobless claims and continued strength in the housing market.
Markets behaved in a somewhat orderly fashion last week, oscillating in a fairly narrow band that left U.S. equities slightly in the red for the week. We’d stop short of labeling last week the ‘calm before the storm” because analysts think there are credible reasons for stocks to have a toehold. That said, analysts think investors would be well served to brace for a bumpier ride as we work our way to, and through, the election.
Current conditions are prompting a perception among some investors that the election represents a binary outcome for the market. November 3 may be viewed as a seminal moment in our country’s political landscape, but when it comes to investing, it’s the much broader periods of time – not singular moments – that matter most. In addition to political headlines and reasonably encouraging economic readings, last week brought a few market anniversaries, including the 33rd anniversary of the “Black Monday” crash.
Metals and Mining
After the second and final US presidential debate on Thursday, gold moved above the key US$1,900 per ounce threshold. After slipping below that level earlier in the week, investors regained hope that a US stimulus package could be close at hand. Gold’s steady growth trend was disrupted this week as the US dollar strengthened, adding volatility to the yellow metal’s value. The other precious metals were also on course to end the week in the green. Entering the five-day period at US$1,910 before slipping to US$1,895 on Wednesday, a subsequent rally pushed gold as high as US$1,927 by the headwinds mentioned. Because gold is considered a hedge against inflation and currency debasement, the next round of stimulus is expected to add to its value. On Friday an ounce of gold was trading for US$1,893.66. Silver had been locked at the US$24 per ounce range since the end of September but moved above US$25 briefly this session. While the trend to US$25 was unsustainable, silver remained above US$24.50 for the remainder of the week. The nature of the dual metal as a leveraged play on gold has worked in its favor, prompting analysts to note that during bull markets silver traditionally outperforms gold. That was evident during Q3, when silver outpaced its yellow sister significantly. During the period, silver added 34 percent to its value, gaining more than 60 percent year-to-date at its quarterly peak. On the other hand, gold added only 6.9 percent to its value in total for Q3, and 16 percent when it touched an all-time high of US$2,063. Though gold and silver have spent the last four weeks edging higher, platinum has been steadily slipping lower. However, that trend was reversed this period, with the automotive metal surging past US$900 per ounce late in the week. Adding 5 percent to value for the week, the metal is positioning to benefit from the rally in precious metals. On Friday, platinum was valued at US$907. The palladium price was also propelled higher this week when it breached US$2,300 per ounce. The price action took palladium back to pre-COVID-19 levels seen in March. But after hitting the six-month high, prices were pressured and fell back to US$2,246. Palladium was selling for US$2,260 on Friday.
The broad base metals space was also in the green on Friday, with all metals registering gains. Copper was the leader, surging to a year-to-date high of US$6,953 per tonne on Wednesday. Demand out of Asia has contributed to the red metal’s ascent to a two-year high. Renewed industrial demand and the US stimulus package are forecast to continue working in copper’s favor. Zinc was also on the move this week, adding 2.7 percent to its value. Despite being shy of its year-to-date high, the metal is still in positive territory. Zinc was trading for US$2,540 per tonne to end the week. Nickel marked a year-to-date high this session when it surpassed US$16,064 per tonne, a 14 percent increase from its January values. The metal has been gaining since late September, as demand from the electric vehicle space is projected to increase. By Friday, nickel had shed some of the gains to trade for US$15,707. Lead also enjoyed a price uptick for the third full week of October. Though it remains well off its year-to-date high, the metal is slowly edging higher and is holding above US$1,700 per tonne. Lead ended the week at US$1,792.
Energy and Oil
On Thursday, the U.S. reported more than 70,000 COVID cases for the first time in three months, and the trajectory suggests the U.S. may break new record highs in the coming days. The numbers help explain weak (and weakening) gasoline demand in the U.S., a theme also unfolding in Europe. The pandemic continues to largely cap any potential price rally. Crude remains stuck at $40, where it has traded for the better part of four months. Demand is weak in Europe, the U.S. and Latin America, and remains depressed as the coronavirus continues to spread. But in Asia, gasoline demand is robust, and even jet fuel demand is rebounding strongly. As Javier Blas notes, there is a very big difference between east and west right now, with Asia looking to pre-pandemic demand levels. IN the final presidential debate, Biden and Trump clashed over oil and climate. While the substance and their positions were not new, the topics of oil, fracking and climate change played a large role in the last presidential debate. Trump has largely ignored the climate science and promises to maintain a friendly stance towards oil and gas. Biden played up the job opportunity of renewables and said the U.S. must transition away from fossil fuels. Democrats propose “blue carbon” bill. A proposal from House Democrats would expand offshore wind while barring new offshore oil drilling.
Natural gas spot price movements were mixed this week. The Henry Hub spot price rose from $2.03 per million British thermal units (MMBtu) last week to $2.86/MMBtu to this week. At the New York Mercantile Exchange (Nymex), the price of the November 2020 contract increased 39¢, from $2.636/MMBtu last week to $3.023/MMBtu this week. This increase marks the first time the near-month natural gas futures price has reached $3.00/MMBtu since January 2019. The price of the 12-month strip averaging November 2020 through October 2021 futures contracts climbed 13¢/MMBtu to $3.133/MMBtu.
Shares in Europe fell on signs that the economic recovery was stalling amid tighter restrictions to curb surging coronavirus infections. The pan-European STOXX Europe 600 Index ended the week 1.36% lower, and major country indexes also declined: Germany’s DAX Index slipped 2.04%, France’s CAC 40 gave up 0.53%, and Italy’s FTSE MIB dropped 0.54% The UK’s FTSE 100 Index lost 1.00%, in part reflecting strength in the pound after the resumption of talks with the European Union (EU) on post-Brexit trade ties. UK stocks tend to fall when the pound rises because the index includes many multinationals with overseas revenues.
The German 10-year bund yield inched up on hopes that the U.S. government would pursue additional measures to stimulate its economy. Yields on sovereign bonds from peripheral European economies largely followed suit. Italian government debt yields also climbed after the sale of EUR 8 billion 30-year bonds, which received EUR 90 billion in offers. An inaugural issue of EU 10- and 20-year social bonds attracted bids of more than EUR 233 billion, far exceeding the EUR 17 billion on offer. The issue is part of the EU’s EUR 100 billion SURE (Support to mitigate Unemployment Risks in an Emergency) bond program designed to support jobs.
Chinese stocks retreated for the week, with the large-cap CSI 300 Index and benchmark Shanghai Composite Index shedding 1.5% and 1.8%, respectively. The yield on China’s 10-year sovereign bond decreased, slowing a steady advance dating back to July. On the monetary policy front, the People’s Bank of China Governor Yi Gang said that China’s key debt ratios could moderate in the coming months as economic growth picks up. Yi also stated that the central bank would pursue a balanced approach to supporting China’s economy, saying that monetary policy “needs to guard the gates of money supply and properly smooth out fluctuations” in the country’s macro leverage ratio. The renminbi currency continued its strengthening against the U.S. dollar aided by strong inflows into China’s domestic bond market, whose relatively high yields have attracted foreign investors.
The Week Ahead
The third-quarter earnings season is in full swing, with almost 40% of the S&P 500 companies reporting earnings throughout the week. Important economic data being released include consumer confidence on Tuesday, third-quarter GDP growth on Wednesday, and personal income and spending on Friday.
Key Topics to Watch
- Chicago Fed national activity index
- New home sales (SAAR)
- Durable goods orders
- Core capital goods orders
- Case-Shiller national home price index (year-over-year change)
- Consumer confidence index
- Home ownership rate (NSA)
- Advance trade in goods deficit
- Gross domestic product (SAAR)
- Initial jobless claims (state program, SA)
- Initial jobless claims (total, NSA)
- Continuing jobless claims state program, SA)
- Continuing jobless claims (total, NSA)
- Pending home sales index
- Personal income
- Consumer spending
- Core inflation
- Employment cost index
- Consumer sentiment index