Markets hate uncertainty

Abraham George Macro View

Those who have been following world markets and politics know very well that we are in a very high stakes election in the US which will be held in the next 8 days. It will have major implications on climate change policies, matters relating to China, the dollar’s position as a reserve currency, the future of oil, geopolitical leadership and many more.

On the election front, the prospects of a drawn out vote count or even contested election are increasing. If the election day outcome were overturned with mail in votes, it’s more likely the election will be disputed, with the potential of the matter being decided by the Supreme Court.

So there is a lot of uncertainty ahead of us and the markets don’t like that. The markets are also coming to a realization that a second fiscal stimulus/ aid package may not be coming. The increased spread in COVID cases is not helping either. Stocks are supposed to be a barometer of confidence and can also influence confidence in the economy. That is being tested now. While markets are down 2% for the week, there is no real “flight to safety” as Gold is unchanged and bonds are not that strongly up.

Equities

The markets gapped lower yesterday and quickly broke below 28,040 in the Dow the intraday extreme from Oct 22. Yesterday’s succession of lower lows and lower highs are intact from Oct 12. On the big board there were 7 stocks that were down for every one stock that was up. In the S&P 500 almost 92% of the index components closed lower. Yesterday saw the strongest selling pressure since late June.

Yesterday markets broke below 3415 the support level in the S&P 500 and filled the gap to 3361. It looks like the markets will aim to go below the Sep 24 low. Only a move above 3477 should challenge this outlook.

Bonds

The snap back rally that we alluded to in, yesterday’s report carried prices to 173^30. This area could be a stopping point but prices can still rise to 174^20 before turning down.

Euro

There is nothing much to add in the Euro as prices are tracing out up and down movements in a triangle. Eventually the breakout should come to the upside.

Gold

Gold is still trading very much within its ranges. One thing to note is small traders have increased their net long positions since Feb 2013. This means the public is very bullish gold and that normally should be viewed as a contrarian indicator.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.