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Earnings Season Arrives with Big Banks

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Dow Jones Forecast:

Dow Jones Price Outlook: Earnings Season Arrives With Big Banks

Stocks gapped higher at the open and never looked back to start the week with technology components leading the charge. Price action saw the Dow climb to its highest point since September 3, effectively eradicating a potential rising wedge formation. That said, stocks seemed to lack a direct catalyst behind the most recent leg higher, a potentially worrisome consideration ahead of a week filled with stock-specific insight slated for release.

Dow Jones Price Chart: 1 – Hour Time Frame (September 2020 – October 2020)

Dow Jones Price Outlook: Earnings Season Arrives with Big Banks

That being said, the Dow Jones will have to negotiate a string of upcoming earnings which will begin with some of the country’s largest financial institutions. Two major Dow components, United Healthcare Group and Goldman Sachs, will report Tuesday morning alongside Bank of America, Wells Fargo and PNC Bank. They will be followed by United Airlines and Alcoa after the close. Morgan Stanley will follow on Thursday morning while next week will see hundreds of companies report each day.

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While recent price action might suggest stocks have become detached from their fundamentals, the coming earnings season will provide an opportunity for traders and investors to gain insight into key themes. The pace of covid-recovery, the US-China trade war and potential sensitivities to the upcoming Presidential election are just three of the major themes that might be fleshed out in the upcoming reports.

Perhaps more importantly, earnings season will also provide insight on the underlying profitability and revenue expectations that make up the seemingly bulletproof US stock market. As it stands, data from FactSet suggests earnings are expected to decline by more than -20% in the third quarter even as the S&P 500 trades just a few percentage points from its all-time high. That said, second quarter earnings came in considerably above expectations as companies have shown an ability to beat their revised estimates.

earnings season chart

With earnings expectations being revised upward and price soaring alongside those revisions, it becomes a question of how much the market has priced in the coming reports. Should the broader performance beat expectations, will the market suffer a “buy the rumor, sell the news” fate? Or can a positive string of results fuel another leg higher? In the meantime, follow @PeterHanksFX on Twitter for updates and analysis.

–Written by Peter Hanks, Strategist for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX





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How Will the Election Affect the Stock Market? Dow Jones Forecast

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Dow Jones Price Outlook:

  • Data from the last ten Presidential elections reveals the Dow Jones Industrial Average typically climbs around an election
  • Still, it is difficult to attribute any equity strength to an election singlehandedly as an infinite number of themes are at play in the market at any given time
  • Dow Jones: A True Cross Section of American Industry?

How Will the Election Affect the Stock Market? Dow Jones Forecast

Global stock markets have been on a wild ride in 2020 thus far, juggling the coronavirus and the various monetary and fiscal decisions central banks and governments have made in response. If a global pandemic were not enough, the Dow Jones, Nasdaq 100 and S&P 500 will have to negotiate a looming Presidential election – an event that frequently dominates media and popular culture in the lead up. While it may feel like the election and its social implications can take over everyday life, what impact has it had on the stock market in the past?

Dow Jones Performance in the 12-Months Before and After a Presidential Election

dow jones price chart in election years

Data Source: Bloomberg. Compiled by Peter Hanks

With the assistance of data from the last ten US Presidential elections, history reveals the stock market – more specifically the US benchmark Dow Jones index – typically rises on average before, during and after an election. That being said, there are a few caveats for which we must account. First and foremost, stocks generally rise over time in general, with the 30-year annualized return of the S&P 500 at roughly 8%. Similarly, the 30-year annualized return of the Dow Jones is slightly more than 5%.

Difference between Dow, Nasdaq, and S&P 500: Major Facts & Opportunities

With that in mind, seeing the Dow Jones rise modestly on average across ten presidential elections is not entirely surprising. To that end, drawing such conclusions from only a limited sample of data is presumptuous. Consequently, the saying that ‘past performance is not indicative of futures results’ is very apt for circumstances such as this where statistics cannot assure better equity performance than a non-election year.

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As displayed in the graph above, some years are dominated by themes other than the Presidential election. 1996, 2008 and 2020 are just three instances whereby external influences like the ballooning of the Dot-Com Bubble, the Great Financial Crisis and coronavirus respectively have (or are currently) exerted as much or more influence than the changing of the guard in the Oval Office – although the coming election may surprise yet.

Suffice it to say, 2020 has proven to be anything but ordinary and external factors like trade wars, monetary policy and the pace of the pandemic recovery may all have varying degrees of influence over the stock market. Further still, the trajectory of these themes could be altered significantly after the election – possibly changing the shape and scope of an issue like US-China relations or technology regulation. Undoubtedly then, stocks will have their hands full in the coming months and it is difficult to say that Presidential elections are a positive development for equities.

VIX futures price chart

One theme we can attribute to an election with more confidence is an increase in volatility. Elections and their potential impact on government and fiscal policy can create uncertainty – a phenomenon most investors detest. With uncertainty often comes volatility and this volatility can be observed in the October VIX futures contract as it reflects the lead up to the election. In the subsequent months’ contracts, the assumption of volatility in VIX pricing steadily declines as the election impact fades into the rearview.

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Thus, it can be surmised that an election’s impact on stock prices would inevitably fall with a general trend of strength, but expecting an increase in volatility may be the more likely outcome. As the election draws closer and potential policies are given more clarity, specific sectors may rise or fall depending on the forecasted outcomes. Healthcare, energy, technology and companies with sensitivities to US-China relations may all be subject to fundamental changes after the election.

Stocks like Amazon, AbbVie and Zoom are just a few examples of those with potentially heightened sensitivity to changes in the US administration, while corporations like Caterpillar, Boeing, Lulu and Walmart may be more closely aligned with the pace of economic recovery. Evidently, various themes to be negotiated around the election are already at play and divergent performances are likely.

S&P 500 price chart by month and vix price chart

Data source: Bloomberg. Compiled by John Kicklighter

With increased volatility to boot, these moves could see their magnitude increased regardless of direction, especially as trends in seasonality exacerbate election uncertainty. With the election drawing ever-closer, 2020 surely possesses the catalysts to differ from the typical election-year and trading opportunities are abound as a result. As the election nears, check back at DailyFX for election coverage from a macroeconomic perspective.

Open a demo FX trading account with IG and trade currencies that respond to systemic trends.

–Written by Peter Hanks, Strategist for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX





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US Dollar Mired by Fiscal Stimulus Deadline

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US DOLLAR OUTLOOK: USD PRICE ACTION HINGES ON STIMULUS DEAL DRIVEN VOLATILITY

Fiscal stimulus negotiations continue to largely drive the direction of the US Dollar. The DXY Index declined around half a percent during Monday’s trading session with FX traders still seeming optimistic that US politicians can agree on another coronavirus aid package before the upcoming election.

Over the weekend, House Speaker Nancy Pelosi placed a 48-hour deadline for the Trump Administration to reconcile their $1.8-trillion package proposal with the $2.2-trillion stimulus bill laid out by Democrats. Senate Leader Mitch McConnell is expected to call for a vote on a targeted stimulus deal that carries a much lower price tag at around $500-billion.

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US DOLLAR INDEX PRICE CHART: DAILY TIME FRAME (17 JUL TO 19 OCT 2020)

DXY Index Price Chart US Dollar Technical Forecast

Chart by @RichDvorakFX created using TradingView

The prospect of more fiscal firepower to counter the coronavirus pandemic’s toll on the US economy is a primary driver of recent USD selling pressure. That said, uncertainty surrounding the likelihood that House Democrats and Senate Republicans can set aside their political differences to agree on another stimulus deal has contributed materially to US Dollar volatility. Discrepancies largely remain over the amount of fiscal funding to provide to state and local governments. Failure to reach a deal before the two-day deadline imposed by Speaker Pelosi opens up the door to potential for a big breakdown in stimulus negotiations, which would likely stand to send the US Dollar exploding higher and stocks swooning lower into the November 2020 election.

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Meanwhile, the broader DXY Index still gravitates around a critical level of technical confluence underpinned by its 50-day simple moving average. USD price action also looks coiled between two conflicting trendlines: a short-term bearish trend identified by the lower highs recorded on 25 September and 15 October juxtaposed with a medium-term bullish trend developing from higher lows printed on 31 August and 12 October. A break below the ascending trendline could tee-up a quick move toward technical support highlighted by the 92.75-price level whereas a break above the descending trendline might motivate US Dollar bulls to target the 94.00-handle and September swing highs.

USD PRICE OUTLOOK: US DOLLAR IMPLIED VOLATILITY TRADING RANGES (1-WEEK)

USD Price Chart Outlook US Dollar Implied Volatility Trading Ranges

Key FX counterparts to the US Dollar – such as the EUR and GBP – have also contributed to recent Greenback turbulence. EUR/USD and GBP/USD comprise 57.6% and 11.9% of the DXY Index respectively and thus tend to weigh notably on the broader US Dollar. As new COVID-19 cases climb and restrictions on business activity are reimplemented across the Eurozone and UK, mounting coronavirus concerns might exacerbate potential US Dollar strength given its status as a top safe-haven currency.

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Not to mention, the Pound-Dollar remains exposed to ongoing Brexit drama as well. GBP/USD is estimated to be the most active major currency pair this week according to one-week implied volatility readings clocked as of Friday’s close. Options-implied trading ranges are calculated using 1-standard deviation (i.e. 68% statistical probability price action is contained within the implied trading range over the specified time frame).

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight





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Pound Trends Higher as EU Pledges to Intensify Brexit Talks By Investing.com

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© Reuters.

By Yasin Ebrahim

Investing.com – The pound eased from against the dollar from session highs Monday, but remained supported as the EU appeared to extend an olive branch, saying it remains committed to intensifying Brexit-deal talks with the U.K.

to rose 0.45% to $1.2971, below session highs of $1.3025, but well above lows of $1.2897.

EU Brexit negotiator Michel Barnier confirmed the EU remained “available to intensify [Brexit] negotiations in London,” marking a change in tone somewhat after EU leaders had dropped their pledge to intensify trade talks last week and called on the U.K. to make concessions for a deal.

U.K. Cabinet Office Minister Michael Gove had suggested the U.K. would not resume talks moments before acknowledging signs of progress, “Even while I’ve been at the dispatch box, it’s been reported that there has been a constructive move on the part of the EU and I welcome that,” Gove said.

The game of brinkmanship between both parties, however, is expected to continue in the wake of little progress on key issues that have held back talks including the so-called level playing field commitments, fisheries and issues of governance.

The positive start to the week for sterling comes as speculative traders appear to be betting both sides will eventually find common ground and clinch a post-Brexit trade deal.

Ahead of yet another crucial phase for Brexit and sterling this week, “we suspect market positioning on GBP did not shift too much on the short side after the confrontational comments and threat of no-deal witnessed last week,” ING said in a note. “[W]e believe this is a market that is far from pricing in a no-deal outcome and we would not be surprised to see only a minor uptick in GBP net-shorts in the next CFTC report.”

“We remain of the view that the downside risks for sterling in a no-deal scenario are still sizeable,” ING added.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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