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Dow recovered on renewed hopes of CARES Act 2.0

calendar 16/10/2020 - 11:33 UTC

The U.S. stock market (Dow Jones Industrial Average) closed around 28494.20, ticked down -0.07%, almost flat as it recovered from a deep plunge on renewed hopes of CARES Act 2.0 for around $2T, almost 10% of the U.S. GDP (and 80% on the Indian GDP!!). With CARES Act 1.00 of $3T, the U.S. corona stimulus would be around $5T, almost 25% of the GDP. The market is now almost assured that whoever be in the White House after Dec’20 (Biden or Trump), the CARES Act 2.0 for around $2T is almost a done deal and it may be a reality even by next Monday (19th Oct), as Pelosi and Mnuchin (Trump) is actively engaged in negotiations and formal texts of the next COVID-19 relief package.

On early Thursday, Dow crumbled over -300 points on CARES Act 2.0 suspense and increasing COVID-19 uncertainty on both sides of Atlantic (Europe-U.S.), resulting in partial lockdown and various restrictions, hampering normal economic & social activities.

The COVID-19 vaccinations for even 50% of the global population will take significant time through 2021-23. Thus the scarring and stigma factor will be there; consumers will not feel confident enough, hampering private investments (capex) and economic recovery. And the overall recovery shape may be ‘U’ rather than ‘V’. Going forward, although Q3 may be bright, the Q4 may be less bright because of the serious concern of COVID-19 resurgence in the fall and festival season, resulting in partial lockdowns in various places all over the world.

Looking ahead, apart from COVId-19, the outcome of the U.S. election will also influence global economic recovery; if Biden wins a trifecta (White House, Senate and Congress), there may be less trade/cold war narrative (China, EU) and more policy certainty, while under 2nd term of Trump, it would be the opposite; there may be more protectionism/unilateralism rather than globalism/multilateralism.

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Now talking about U.S. election and CARES Act 2.0 daily soap-opera, on late Wednesday, Dow slips almost -300 points from the session high after the U.S. Treasury Secretary Mnuchin virtually poured cold water on any prospect of the much-awaited fiscal stimulus. Mnuchin and U.S. House Speaker Pelosi talked Wednesday but again did not reach a deal and they may again talk on Thursday. Mnuchin also pointed specifically to funding for state and local governments – which has been a point of contention for months – as one main area of disagreement.

Mnuchin indicated Democrats’ resistance may be politically motivated, as they may believe approving a stimulus package in the weeks leading up to the election could provide a boost to President Trump’s poll numbers. Mnuchin said the White House could use unspent CARES Act 1.0 funds to provide immediate relief, including direct payments to people. Mnuchin said $300 billion from the CARES Act 1.0 remains unspent – a fund that could be repurposed for items like PPP loans, another round of stimulus checks, airline aid or job support. But distributing those funds would also require congressional approval: We could get that money into the economy quickly.

Mnuchin said:

I spent almost an hour on the phone with Speaker--- We had a comprehensive discussion on a lot of issues---- We continue to make progress on certain issues, but on certain issues, we continue to be far apart----but getting something done before the election and executing on that would be difficult---

On late Wednesday, Pelosi’s Secretary Hammill tweeted, confirming the 1-hr telephonic talks and some progress:

The Speaker and Secretary Mnuchin spoke this morning by phone at 9:30 a.m. for approximately 1 hour. In response to proposals sent over the weekend, the two spent time seeking clarification on language, which was productive. One major area of disagreement continues to be that the White House lacks an understanding of the need for a national strategic testing plan. The Speaker believes we must reopen our economy & schools safely & soon, & scientists agree we must have a strategic testing plan. Staff will continue to exchange paper and the two principals will speak again tomorrow.

Subsequently, on early European Thursday, Dow Future plunged almost -400 points on lingering uncertainty about CARES Act 2.0, the resurgence of COVID-19, vaccine and Brexit.

But on early U.S. Friday, Dow Future recovered to almost flat after Trump said he is ready to go above $1.8T CARES Act 2.0 (vs Pelosi’ $2.2T) and he also believes there is a chance its bill will be passed before the November 3 election as there is a lot of pressure on Pelosi. Trump also blamed China for all the COVID pandemic and economic devastation, reiterating he has not spoken with Xi for a long time and will not speak in the future also---it’s all China’s fault and thus China will pay the bill (CARES Act 2.0). We may see another wave of trade/cold war in 2021 if Trump wins the Oval office.

Technical Outlook: SPX-500, DJ-30, and NQ-100 (Futs):

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