Uncertainty and speculation rule the markets

Abraham George Macro View

We are going to get into a season of uncertainty and speculation mostly all driven by the US presidential election. So choppy markets should be the outcome. Meanwhile the polls are swinging probably to a tight outcome. Reuters are still projecting it at a seven point lead in Biden’s favor and FT is around eight points.

There are clear biases in all these polls, given the media’s position on Trump (coverage bias) and given the propensity of Trump supporters to decline a survey (non-response bias). What will Trump do to turn things around? One thing for sure is the rhetoric against China will become more louder and combative. Restoring confidence in Trump and his government will be a tough task given all that is happening now. The first presidential debate will be on Sep 29 followed the vice- presidential debate on Oct 7 and then again by another two presidential debate on Oct 15 and Oct 22 with the elections on Nov 3.

In the last 7 days the tech giants have given up considerable ground. Other broader markets have also followed the lead of the big tech giants as it has been a proxy on global risk appetite. Over the last six years if you were invested in the S&P 500 index minus the five tech giants you would have had a growth of approximately 30%, meaning your $100,000 is worth $130,000 in 6 years. However if you were invested in the major five tech stocks alone (Apple, Microsoft, Google, Amazon and Facebook) the return would be 400%. Your $100,000 will be $ 400,000. How many of the retirees would have made such a concentrated bet.

Equities

The major indexes have closed 4 out of 6 days lower since the Sep 3 high. The two rally days came on Sep 9 and Sep 11. Both days had weaker positive breadth relative to stronger negative breadth. Friday’s NYSE a/d ratio was actually negative despite a positive DJIA and S&P close.

Are we close to a calm before the storm? We don’t know. But there are some event risks just ahead of us. On Sep 16 the Fed should be making their usual post- meeting pronouncements. Nothing earth shattering is expected there. On Friday 18th we have the quadruple witching where we will have the confluence of expiries on futures and options on stocks and indexes which will be soon followed by the Autumnal Equinox on Tuesday, Sep 22. The Equinox window is between Sep 16 to 22 and historically it has shown heightened volatility and trading activity. We still hold strong biases to the downside.

Bonds

Bonds are looking more like a plane preparing for landing at 35,000 feet. As long as it remains capped under 177 and if it breaks 175 a move down should accelerate soon.

Euro

The euro spiked to 1.1918 on Thursday but soon gave up its gains. The near term structure is open to interpretation but the up move so far looks corrective in nature. As long as it stays under 1.1918 the downside can be entertained.

Gold

Gold’s pattern is turning out to be one large triangle which means that it may break up before it turns down. Triangles normally occur in fourth waves. The repeated attempts to not break below 1900 has been worrying. So one can go with a possible break up above 2072 but we would rather wait for a more clearer picture.

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.