Biden’s Stimulus proposal, Bank Earnings, US Data confirms weaker growth, Oil, Gold/FX, Bitcoin

Risk aversion is percolating as investors brace for arduous negotiations over Biden’s stimulus proposal.  Not helping sentiment is the Trump administration passing of the US-China trade/tech war baton.  The blacklisting of another 9 Chinese companies brings the Defense Department total to 44 companies that may be owned or controlled by China’s military.  These measures will also punish US manufacturers as they will struggle to fill their chip supplies.  

Throughout the pandemic, the official start of earnings season was mostly positive for stocks as most of the banks painted a picture of a resilient consumer and impressive trading results.  Today, JPMorgan, Citigroup, and Wells Fargo kicked off earnings season and near-term uncertainty and longer-term competition sent the entire banking sector lower.

JPMorgan posted a strong earnings and revenue beat, raised this year’s Net interest income guidance, and boosted their stock buyback program by 500 million shares.  CEO Dimon was downbeat and emphasized the near-term economic uncertainty and warned that China’s big banks could become serious competitors in five to ten years. 

Wells Fargo shares fell after posting soft revenue and net interest income.  Citigroup shares were punished after disappointing FICC Sales and trading revenue.  All the big banks are trading lower given the soft start to earnings and as Treasury yields slide.  

US stocks are selling off as investors digest Biden's American Rescue Plan.  It doesn't help we are going into a long weekend, so things could get uglier into the close.  

Biden

President-elect Biden’s $1.9 trillion COVID relief proposal was met with some opposition from Republicans but is still expected to get passed through once it is slimmed down.  Biden’s priorities include: $1,400 stimulus checks, increased unemployment benefits, money for state-and-local government aid, and vaccine programs.  At some point in early February, the relief package will probably end up being closer to $1 trillion.    

US Data

The US consumer had a tough holiday season as it seems most of the spending was done earlier in the pandemic.  Retail sales for December fell 0.7%, worse than the flat reading that was eyed, with the prior reading seeing a sharp downward revision.  The control group, which excludes gasoline, automobiles, food services, and building-materials, fell 1.9% and the prior reading was revised significantly lower to -1.1%.  The control group mimics the consumption component of GDP and will likely drag down estimates for fourth quarter GDP.  

With 18 million people still receiving unemployment benefits and a large part of the economy still working from home, Wall Street should not be surprised with these dismal sales numbers.

The Empire State manufacturing survey was still in expansion territory, but the slowdown is worsening.  NY manufacturing was at 17.0 in September and has steadily declined to 3.5 in January.  

Producer prices rose less-than-expected, mostly powered by energy, and will not raise any alarms for down-the-road price pressures for consumers.  

The argument for more fiscal support and a quick passing of Biden’s stimulus proposal were supported following weaker than-expected retail sales, Empire State Manufacturing Survey, and producer prices data.  Industrial production and Manufacturing data however both impressed and have been unfazed by the third COVID, but that should not change the downbeat assessment of the economy.    

US Sentiment

US stocks extended declines after the US consumer sentiment softened more than forecasted in January.  The US is seeing the worst of the virus and with a disappointing start to vaccine rollouts, optimism for the economy is quickly fading.  

Oil

Crude prices tumbled from a 10-month high as the dollar rebound resumed following sluggish US economic data that painted a darker short-term outlook for the world’s largest economy.  Oil needed a big catalyst to keep the recent rally going so energy traders didn’t need much to head for the sidelines.  Heading into a three-day weekend in the US, now was a great time to take off some risk, which is also adding to today’s slide in oil prices.

The dollar rebound could last a little longer as Congress will have the standard back-and-forth over stimulus negotiations.  Stimulus uncertainty should keep commodities under pressure as risk aversion flows will boost the greenback.    

Gold/FX

Gold was supposed to have an easy end to the week after prices were supported on both Fed Chair Powell’s comments on tapering and on Biden’s announcement of a larger-than-expected COVID relief bill.  The overcrowded bearish bets against the dollar still needs to get undone.  It seems last week’s dollar rebound was just the beginning.      

Gold has a strong case to rise higher, but it won’t shake off a surging dollar.  The dollar seems poised to make a big run here as we brace for a few weeks of stimulus debate in Washington DC.  Gold could soften towards $1800 and if buyers don’t emerge, it could get ugly fast.  With many Americans taking advantage of the three-day weekend, gold could have some wild swings.  

Bitcoin

Bitcoin is the riskiest asset and is one of the first things sold when we have a strong move in the dollar.  Bitcoin could get in trouble if this dollar rally accelerates.  The $30,000 level could easily get tested  for Bitcoin if the greenback pushes higher.