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The U.S. stock market (Dow Jones Industrial Average) closed around 26763.13 Wednesday, plunged almost -1.92% (-525 points) on the renewed concern of COVID-19 resurgence, fading hopes of further monetary stimulus, the suspense of further fiscal stimulus, and the U.S.-China cold war tensions coupled with growing U.S. political and COVID-19 vaccine uncertainty. The risk trade was also affected by rising COVID-19 infections on the other side of the Atlantic (Europe) and the renewed concern of lockdown 2.0, at least partially. The market is also concerned that if Biden wins in the Nov election, he may increase personal, capital gain, and also corporate tax. Dow was also dragged by fading hopes of Fed’s monetary stimulus as Powell virtually throws the towel and kicked the can down the road to Capitol Hill for more fiscal stimulus as the Main Street now needs grants rather than loans.
On Monday, in his 15-mins UN address Monday, Trump mentioned China 15-times and called for accountability on China for ‘unleashing’ the invisible enemy (COVID-19) all over the world by allowing international flights during the Wuhan epidemic days.
On Wednesday, in his 2nd day of Congressional grilling (testimony), Powell reiterated that additional direct fiscal support might be needed for the U.S. economy to successfully overcome the coronavirus crisis. Speaking before the House Oversight and Reform Select Subcommittee on the Coronavirus Crisis, Powell said that the path ahead continues to be uncertain despite the rebounds in the housing and business sectors. He stressed that the full economic recovery would happen only when people are confident they can safely engage in all activities. And commenting on the tools still available to the Fed, Powell virtually clarified the Fed has basically done all of the things it could think of.
Also on Wednesday, Vice Chairman of the Federal Reserve Clarida said that the Fed is likely to keep its interest rates near zero percent until the inflation hits 2%. Clarida noted that inflation needs to spend some time above 2% to offset the time spent below it and inflation is expected to reach the mark in three years. The US economy will likely need additional fiscal support as there is still a deep hole given high joblessness and risks to small businesses. However, the economy has made a lot of progress since the reopening of the country and it is heading towards an impressive return to low unemployment that remains one of the Fed's main goals.
Dow recovered Tue on hopes of CARS ACT 2.0, Fed’s ZIRP pledge till 2023, and tech boost
The U.S. stock market (Dow Jones Industrial Average) closed around 27288.18 Tuesday, surged almost +0.52% (+141 points), snapping 3-day losing streaks on hopes of CARES ACT 2.0 and tech boost after a report that Chinese leaders are divided over releasing the so-called unreliable entity list of U.S. tech companies as a retaliation against Trump’s bellicose policies for various Chinese techs (TikTok, WeChat, Huawei, etc). But on Tuesday, Dow was also affected by a war of words between Trump and Xi in their respective UN address.
Dow was also boosted as the Fed Chair Powell said in his prepared testimonial text that the Fed is prepared to use all its tools as long as necessary for a sustainable economic recovery. In his congressional testimony on Coronavirus Aid, Relief, and Economic Security Act, the Fed Chair Powell basically urged for more grants (fiscal stimulus) rather than loans (monetary stimulus/liquidity).
Powell tried his best to convince Capitol Hill lawmakers of both sides (RNC-DNC) to agree for CARES ACT 2.0 ahead of the Nov election as most of the vulnerable section of the society and business now needs grants rather than loans. Powell reiterated the economic recovery would depend on the successful containment of the COVID-19 curve. Powell also attributed more than expected economic recovery to the unprecedented fiscal stimulus provided via CARES ACT 1.0 ($3T grants).
The U.S. Treasury Secretary Mnuchin also admitted that it can’t provide new aid without Congressional sanction. Mnuchin also assured that despite ongoing cold war tensions, China is on track to fulfill its pledge to buy $36.5B in U.S. agricultural products by the end of the year and he and USTR Lighthizer are very carefully monitoring the progress. Mnuchin also pointed out that President Trump would immediately sign off on additional funds for the PPP. Mnuchin argued again for a more targeted CARES ACT 2.0 economic relief package that would focus on areas of the economy that were particularly hard-hit by the pandemic, like the travel and restaurant industries. Mnuchin said the White House is ready to reach the bipartisan agreement on CARES ACT 2.0.
Also on Tuesday, the Chicago Fed President Evans ‘corrected’ himself and said he expects the inflation to remain below 2% for a number of years and accommodative policy should remain in place for as long as the inflation stays low. Further, on Wednesday, Evans said the Fed is willing to exceed its inflation target, asserting a 2.5% inflation is likely in the cards for some time: Will keep rates where they are until full employment, inflation gets to 2%, and overshoots it is unbelievably important to surpass the target for some time---the monetary policy setting is currently adequate but that the Fed is ready to pivot to greater accommodation when needed.
On Tuesday, the Richmond Fed President Barkin said spending in the U.S. has been experiencing a faster recovery than the labor market. But, the jobless claims remain on a stubbornly high level, while the latest jobs report exceeded his expectations in a positive way. Barkin also pointed out that spending on goods has been increasing at a faster rate than spending on services, but the uncertainty would rise for as long as the number of cases and case rates do.
Technical Outlook: SPX-500, DJ-30, and NQ-100 (Futs): Updated 09/09/20
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