US stocks are struggling for direction as investor skepticism over a holiday stimulus deal grows, jobless claims are starting to trend higher, and as the red-hot IPO market continues. The ECB delivered a well-telegraphed boost to their stimulus program, likely paving the way for expectations for the Fed to do their part in expanding their bond-buying program next week. The Nasdaq is once again outperforming its peers as back-to-back successful IPOs from DoorDash (NYSE listed) and Airbnb (Nasdaq listed) continue to drive interest into a flurry of companies that aim to be the next FAANG stocks. Airbnb's trading debut was well received with an opening price of $146, a 115% jump from the $68 IPO price. Roblox, a virtual-world gaming platform, is the next big IPO everyone has their eyes on, but it doesn’t stop there. ContextLogic Inc and Affirm Holdings are also expected to come to market soon.
Regulatory hurdles this time seem more severe for Facebook, prompting some investors to now try to find the next big trade. For some investors, it’s beginning to look a little like 2000 in the tech space; a unicorn IPO parade, massive valuations, and as the current coronavirus surge will likely keep the work-from-home stocks bid. US equities can't continue the climb higher to uncharted territory without a strong outlook from the tech sector. Mega-cap tech stocks might have some regulatory and valuation headwinds in place next year, but that is unlikely to trigger a mass exodus of stay-at-home stocks from millenials. The tech bubble isn't near popping and could potentially grow for quite a while.
Optimism remains mixed that Congress will get a virus relief package done before the holidays. Both Treasury Secretary Mnuchin and House Speaker Pelosi are providing optimism that they’ve made progress in getting a deal done, but none of that matters unless Senate Majority Leader McConnell bends a little on state and local government aid and gets some concession on liability protections. The clock is ticking, and a breakthrough needs to happen soon before this gets pushed into next year. With COVID daily deaths reaching some of the deadliest days in American history and a deteriorating labor market, Congress needs to deliver something before the Cares Act programs expire at the end of the month.
The third coronavirus wave is ravaging businesses and has US jobless claims trending higher. Applications for unemployment benefits jumped 853,000, higher than the consensus estimate of 725,000 and revised prior reading of 716,000. Continuing claims also rose for the first time since August, up 230,000 to 5.76 million. Despite being this far along in the economic recovery, jobless claims remain elevated and almost triple what was seen before the pandemic. The writing appears to be on the wall that the next labor market report will produce a negative reading. The staggering death toll and healthcare capacity constraints point to greater lockdowns that will continue to pressure small businesses. The next couple of months are going to get uglier for the labor market and that should force Congress to get their act together.
The ECB delivered fresh measures to support the economy as the latest wave of coronavirus will force pandemic restrictions to remain in place. The ECB boosted the emergency bond-buying program by 500 billion euros and extended it by nine months, through March 2022. Ultracheap loans for banks were also provided in hopes it will spur lending.
With inflation not coming anywhere near their target, a strong euro will keep the deflationary pressures alive, thus forcing the ECB to remain accommodative a lot longer. Lagarde stated they will continue to monitor the euro “very carefully”.
More QE is likely to do little to disrupt the rally in the euro. If China, the EU’s largest trading partner keeps on chugging along, the ECB could tolerate euro strength towards the 1.30 level.
Crude prices are surging in anticipation of the FDA’s potential approval of Pfizer’s vaccine, as Asia’s economic recovery is making Chinese and Indian refiners acquire more oil, and on rising geopolitical risks in the Middle East after Iraq had two wells hit. It seems the impending lockdowns across the US and the potential hit to crude demand is being compensated by improving trends across Brazil, the UK, and most of Asia.
Brent crude recaptured the $50 level for the first time since March and that might just be the beginning. The crude demand outlook over the next few months is improving with the exception of the US. The geopolitical risks in the Middle East appear to be elevated given the Trump administration's efforts and that should prevent traders from focusing on the rising stockpiles in the US.
Gold prices went on a rollercoaster ride after a surge in jobless claims boosted stimulus expectations, only for Senate Majority Leader McConnell to throw cold water on the bipartisan stimulus proposal. No progress has been over the red lines despite what Pelosi and Mnuchin have been saying. Fresh stimulus before the holidays was starting to get priced in for gold, so any disappointment over the next few days could trigger further selling pressure.
Jobless claims confirmed the labor market recovery has hit a wall as the pandemic rages on. The COVID-19 death toll is producing some of the darkest days in American history. Yesterday, the US saw 3,124 deaths, exceeding the number of deaths suffered in the 9/11 attacks. The Thanksgiving surge could also be followed with a Christmas/Hanukkah surge that will keep large parts of the country in lockdown mode. Gold should start seeing significant support as the punchbowl of stimulus will continue to grow over the short-term Covid pressures. The ECB delivered and that act will be followed by fresh measures from the Fed next week. Gold’s longer-term bullish outlook remains, but December volatility will not go away anytime soon. If the dollar doesn’t deliver a significant rebound, gold prices should see the $1,800 level defended.