Bond Market Message: More Significant Stimulus Package to Come

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U.S. equity benchmarks traded lower in the earlier session, as Wall Street is heading into the last full trading week before the Election Day. Traders may need to prepare for a tight range trading session in coming day.

The Dow and the S&P 500 are coming off their first losing week in four as talks over the next Covid stimulus package dragged on. Treasury Secretary Steven Mnuchin said Friday that House Speaker Nancy Pelosi was still dug in on a number of issues in the aid deal.



Also, the decline in futures came amid a record surge in new Covid cases in the U.S. The country saw more than 83,000 new infections on both Friday and Saturday after outbreaks in Sun Belt states, surpassing a previous record of roughly 77,300 cases set in July, according to data from Johns Hopkins University. White House chief of staff Mark Meadows said Sunday that the U.S. will not get control of the pandemic amid the surge in new cases. Vice President Mike Pence’s chief of staff and three aides tested positive for coronavirus, but his office said he will not quarantine himself.

This week marks the last week of October and the final trading period before November 3. Major averages are on track for modest gains for the month, with the S&P 500 and the Nasdaq both rising more than 3% so far. The 30-stock Dow is up about 2% this month. Based on the action in the stock market we’ve seen over the past two weeks, it seems that it will take some serious news to fuel a significant decline over the next week and a half.

Traders will keep their eyes peeled for a raft of Big Tech and blue-chip corporate earnings as well as key economic data this week. Apple, Facebook, Alphabet, Amazon, Boeing and Caterpillar all report later in the week, while the first look at third quarter GDP is due on Thursday.

On the other hand, bonds racked up the style points, too, in ways that Wall Street tends to read as signs of better economic growth to come. The spread between five- and 30-year Treasury hit nearly a four-year high, and corporate debt has traded firm against the rising government rates.

The gust of selling in the Treasury market cleared the way for more cyclical, financial and value stocks to improve relative to the big growth stocks that have been largely in pullback mode since before Labour Day. Bank shares in the S&P 500 last week gained more than 6%, while the small-cap Russell 2000 managed a gain versus about a 2% decline for big momentum stocks as a group.

All this is encouraging as far as it goes, implying investors are gaining comfort with a solid growth trajectory into 2021, perhaps boosted by another fiscal infusion, without new Covid-related restrictions undercutting the recovery.
 

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