US Close- Stocks drop on bank earnings and stimulus stalemate, Oil and Gold rally on softer dollar

US stocks declined after a mixed second day of bank earnings, diminishing odds for a stimulus breakthrough before the election, and as investors await jobless claims data that will likely show the labor market recovery has hit a wall.  It will be hard for risk appetite to return as Europe continues to go down the path of lockdowns.  French President Macron is expected to announce a night-time curfew in Paris and other major cities.  The city of Liverpool in northern England is on “very high” alert and has announced the strictest set of restrictions.  The COVID-19 second wave in Europe is getting out of control and that should force further action from lawmakers and central banks. 

Earnings

When you take out big tech’s performance today, the broader market is not doing all that bad.  Financials are obviously getting crushed now that the big banks have reported earnings and will have to grapple with easing trading profits and low interest rate environment for the next couple of years.  The banks have shown smaller than expected loan loss provisions, but the virus spread across the northern hemisphere will continue to drag the outlook throughout the winter.  Today, Bank of America and Wells Fargo disappointed with their outlooks, while Goldman Sachs impressed with strong trading results.

Stimulus

Updates on the stimulus front were hardly market moving.  House Speaker Pelosi’s deputy chief of staff said his boss had a productive talk with Treasury Secretary Mnuchin, but it seems both sides are just trying to make sure Americans know they are still trying to get something done.  Mnuchin noted that getting something done before the election would be difficult. 

Pelosi is starting to get more pressure from Democrats, but it is expected for the majority to back her.  Every week, we get a reminder of how bad the labor market is with jobless claims.  This far into the recovery claims are still above the peak reached during the Great Recession.  Coronavirus aid will likely have to wait until after the election and if the polls are right, it will be a lot larger than what is being discussed right now. 

Election Countdown

20 days until the US presidential election and investors are pricing in a Blue Wave. An all Democratic Washington DC means a much larger stimulus bill and a massive infrastructure spending initiative.   The biggest concern for Democrats was voter turnout and that does not seem like it will be an issue.  Over 10.6 million voters have cast their ballots with Democrats leading the surge.  No one doubts that President Trump will lose the popular vote, but uncertainty remains on how the battleground states will unfold. 

Oil

Crude prices are rallying as the dollar slides and as the demand outlook gets a boost from Chinese and Indian refining activity.  Despite the overall risk aversion theme, oil prices held onto gains after reports that OPEC+ expects compliance to be at 102% in September. 

Occidental Petroleum CEO Vicki Holub’s provided some optimism regarding the outlook for oil prices.  She noted that global oil supply and demand will rebalance by the end of 2021 and that the US will never return to the record production of 13 million bpd. 

WTI crude seems destined to be stuck around the $40 a barrel level on dollar strength and demand uncertainty.  Oil will struggle to rally as the dollar seems poised to stabilize as the ECB seems positioned to deliver fresh stimulus a lot sooner than the Fed.  Demand uncertainty will remain in place until Europe and America get the virus spread under control. 

Energy Stocks

Concho Resources might be getting snagged by ConocoPhillips, in what would be a tremendous acquisition of a company with a strong balance sheet and great properties.  M&A activity will keep the energy space looking attractive despite the short-term headwinds on the demand front. 

Gold

Gold prices rose sharply following a weaker dollar but gave back some gains after Treasury Secretary Mnuchin casted doubt a stimulus deal would get done before the election.  A steady stream of negative COVID-19 headlines in Europe will continue to add pressure for the ECB to do more at the upcoming meeting.  Gold’s path higher will be a bit complicated as the ECB contemplates more action, prompting the euro to decline against the dollar.  Ultimately, gold will benefit as Europe unleashes more stimulus and as investors grow comfortable with a slight pause in aid from Washington DC. 

Gold is back above the $1900 level, but all signs still point to a further consolidation.  Until the ECB delivers more stimulus or the Fed shows some urgency in action gold could remain stuck between the $1870 and $1940 range.

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