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Thursday, December 3, 2020

Bears in SPX Still Struggle to Make Downside a Base Case

US stock futures declined on Wednesday, followed by European indices, promising a tough day for those who are betting on extension of Wednesday bounce. S&P 500 futures slipped below 3400 points, but moderate selling indicates that the acute phase of the correction had passed and a period of “healthy” consolidation in the 3250-3400 range is coming.

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Short-term tests below the range are possible, however, there are no fundamental catalysts in sight nor U-turn in market sentiments for consolidation below the lower bound.

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On September 4, when the S&P500 dropped below 3,400, Goldman Sachs maintained its year-end projection of 3,600. The presidential election now poses the greatest risk as Trump is again betting on anti-Chinese rhetoric and “bring back manufacturing jobs in the US.” This adds uncertainty to the political and economic course of the next US leader. It is unknown how far he can go in his campaign pledges. So far, the incumbent has threatened to strip firms from federal contracts which try to save on labor by moving jobs to China.

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Corporate reporting of the US firms included in the S&P 500 for the second quarter beat forecasts in 23.1% of cases (data from Lord Abbett), which is a way higher than 4.7%, the average for the previous 5 years. In the context of yield suppression in alternative asset classes better-than-expected 2Q performance may give some justification to their market valuations.

The US Senate, controlled by Republicans, is going to vote on a fiscal package, the proposed volume of which is significantly thinner compared to previous proposals and amounts to only $300 billion. This is much less than what the Democrats want to pass ($2 tn). Approval of a fiscal package worth at least $1tn would be a powerful shot of optimism for risk assets, but time shows that the GOP wants to approve less and less, increasing uncertainty about the final size date of approval.

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The post Bears in SPX Still Struggle to Make Downside a Base Case appeared first on Tickmill.

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