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Back In A Good Place for Now



Chief Market Analyst

Let your mind wander to a place where there is no pandemic, no contested election, and no squabbling over a fiscal stimulus plan. It’s a pretty good place, right?

Now, let yourself take in the news that Walt Disney (DIS)Cisco (CSCO)Applied Materials (AMAT), and, for some of the young ones out there, DraftKings (DKNG), reported better than expected earnings. What do you think you might see this morning in the futures trade?

You’d most likely see a positive disposition in the futures market. In fact, that is the case this morning and it feels like a virtual reality, because the reality is that there is a pandemic that is worsening, a contested election that is (apply your own sentiment), and continued squabbling in Congress over another fiscal stimulus plan.

Currently, the S&P futures are up 25 points and are trading 0.7% above fair value, the Nasdaq 100 futures are up 81 points and are trading 0.7% above fair value, and the Dow Jones Industrial Average futures are up 229 points and are trading 0.8% above fair value.

We’re pleased to say that the positive disposition stems in part from the good earnings news. Then again, we’ve seen other days where the earnings news was plenty good, yet the disposition of the futures market was negative.

Why are things different this morning? Why ask why? They just are.

Forget yesterday. Why forget it? Because those losses were attributed to concerns about the explosion of coronavirus cases in the U.S. and the potential economic harm that could cause. However, the reports discussing coronavirus trends in the U.S. are even worse today and yet the S&P 500 is on course to open 0.7% higher.

You know what one of the prevailing explanations is for this morning’s positive bias? It is linked to the idea that the market is feeling good about the arrival of a COVID vaccine that will alter the economic landscape in 2021.

To be sure, there was nothing stopping the market from thinking that yesterday (as it had in prior sessions this week), but it apparently stopped its mind from going there and reportedly got caught in a web of neurons transmitting negative thoughts.

The point is that the market was due for some selling as it was, so perhaps the explanation for yesterday’s weakness was the most convenient one, if not an accurate one.

Like we said in yesterday’s column, it will probably take several sessions to flush out the answer as to whether the market is more concerned about the near-term impact of the explosion in coronavirus cases or more optimistic about the potential for a vaccine-induced drive to return to normal in 2021.

Because the futures market is doing what it is doing, the narrative this morning will favor the latter. If the early rally falls apart and the market rolls over, though, you can bet that the narrative will shift to the idea that market participants are concerned about the impact of the coronavirus.

It is worth noting at this early juncture that the positive vibes in the equity index futures aren’t upending the Treasury market.

The yield on the 10-yr note is down one basis point to 0.88%, showing little reaction to a mixed Producer Price Index report for October that featured a 0.3% m/m increase in the index for final demand ( consensus +0.2%) and a 0.1% m/m increase in the index for final demand excluding food and energy ( consensus +0.2%).

The muted response is owed in part to the understanding that yesterday’s Consumer Price Index for October was on the soft side. Another key takeaway is that this Producer Price Index, like yesterday’s Consumer Price Index, was an interest-rate friendly report as it showed tame year-over-year increases of 0.5% and 1.1%, respectively, for final demand and final demand excluding food and energy.

What the final demand for equities is today remains to be seen. Right now there is more demand, which is pushing up the futures market and allowing the bulls to let their minds wander to a good place.

Originally Posted on November 13, 2020 – Back In A Good Place for Now

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