US payrolls, Trump vs. Biden, gold and Brexit trade deal deadline

 

As we move into the final quarter of the year it can be a time for reflection and a time to slow down, not so in 2020. After a year of pandemics, unpredictable stock market moves and some troubling geopolitical developments, there is still the US Presidential election, the EU/ UK Brexit trade deal negotiations and the ongoing economic recovery from the Covid-19 pandemic all to come. Q4 is going to be busy, and this week will lay the foundations for an important quarter. 

Why US jobs growth is slowing

Looking at the US first, the US labour market report for September is released on Friday and it is expected to show that 875k jobs were created this month and the unemployment rate is expected to fall a notch to 8.3% from 8.4% in August. The pace of job growth in the US is falling sharply, in August 1.37 million jobs were created. This decline is down to two worrying factors: 1, the rise in coronavirus cases and localised lockdowns throughout the US, and 2, the failure of the US Congress to reach an agreement to create a second fiscal support package to protect the US economy from the ravages of the Covid pandemic. The US unemployment rate is high, especially compared to the UK and other parts of Europe, because US Federal support for workers effected by the pandemic expired earlier this summer. Thus, this week’s September jobs report will be an important gauge of how desperate the US economy is for more government support. If we see any negative surprises from this week’s report, either a low NFP number or a rising unemployment rate, then we could see stocks sell off sharply. Interestingly, the US stock market may have ended the week on a positive note, however, it saw heightened volatility and a stock market sell off at the start of the week as Federal Reserve officials called for more government assistance to protect the fragile US economic recovery. Since this support has not been forthcoming, stocks are likely to remain sensitive to US economic data in the coming days and weeks. 

US Presidential election countdown, 37 days to go 

The reality is that we are unlikely to see further fiscal stimulus in the US until early next year, after either Trump or Biden are installed in the White House. Who will win November’s US Presidential election could be determined by the outcome of this week’s first Presidential debate on Tuesday 29^th September. The debate takes place late on Tuesday night/ early Wednesday morning European time, so we may not feel the market impact until later on Wednesday. The FT’s Poll of Polls suggests that Biden is on track to win 50.3% of the vote, with 43.1% for Trump; however, this may not be enough to seal a Biden victory as he is currently on track to win 255 electoral college votes when he needs 270 to win. Thus, with 37 days to go before the election, these debates are important. The focus is likely to be on the US’s response to Covid and the economy. It is hard to see how President Trump can put in a strong performance with these two topics in focus, when his leadership has been criticized from both Democrats and Republicans since the outbreak of the pandemic. However, stranger things have happened, and Biden is not always a convincing public speaker. If Biden can land a killer blow, then it may help him to win over the 15 extra electoral college votes that he needs, however, a mediocre performance from Biden could make the outcome of this election hard to predict. While we have said that an outright win for Biden, and for Democrats in Congress, would be bad news for stocks, another bad outcome, in our view, would be no clear winner on election night. This could set the stage for weeks and months of wrangling over the result, and an even longer delay for extra fiscal support for the US economic recovery. This latter point is important and could make stock markets nervous ahead of Tuesday’s debate. 

The dollar pushes gold into the doldrums 

As we mentioned, US stocks tumbled last week as the chairman of the Federal Reserve lambasted Congress for not providing enough fiscal stimulus to support the US economic recovery. Stocks picked up at the end of the week, led by a rally in tech, however, we believe that volatility could remain elevated this week. While stocks have been mixed, the dollar has started to rally, and the dollar index is back at its highest level since July. After rallying 180 points last week, the dollar index is hovering around the 94.50 mark. An attempt to test 95.00 was rebuffed on Friday as investors took profits, however, a second attempt could be made this week as political and economic fears start to mount, and the dollar starts to exhibit signs of being a safe haven. Even USD/JPY managed to stage a decent performance last week, rising to its highest level since mid-September at 105.60; in the short term, a break above 105.75 could open the way for further gains. The dollar also gained strength vs. the EUR. EUR/USD has fallen more than 300 pips this month, and further declines could be on the way. Key support levels lie at $1.15 and then $1.1430. However, we prefer trading gold as a way to express a stronger dollar. When the dollar is strong the price of gold tends to fall, so if you believe that the dollar has turned a technical corner and could rise further from here, then XAU could be in trouble. Gold has already taken a tumble, and is currently trading around $1,860 per ounce, $1,670 is the 38.2% Fib retracement of the January– August rally in gold and is a support level that is worth watching closely. 

Signed, sealed, delivered, investors wait on a Brexit trade deal 

The UK is also in focus this week as the last round of Brexit trade deal talks takes place on Monday, ahead of next month’s EU Leaders’ summit where the trade deal between the EU and the UK needs to be ratified by all EU leaders. There has been much rhetoric from both sides in recent weeks, but now the pressure is on. One EU official said that the deal is 90% there, but there is 10% political negotiation left, which is the tricky part. The business community in the UK and the EU will hope that tough decisions can be made and that cool heads prevail so that a deal is reached. If, and it’s a big if right now, the talks are fruitful and suggest that a trade deal can be reached, then we may see a large rally in GBP, and GBP/USD could return to the $1.30 mark once more. However, negative comments from either side could hit sterling hard this week, and cause the FTSE to sell off, especially, the FTSE 250. In a worst-case scenario, $1.23, the low from the end of June, could be the next downside target for sterling if it looks like the UK is heading for World Trade Organisation rules with its biggest trading partner. Surely, no side would allow that to happen…