Dow futures ran out of gas in overnight trade as concerns about the efficacy of Trump’s proposed pay-roll tax mixed with skepticism that such a measure is even feasible. Unfortunately for stock market bulls, a resounding win for Joe Biden, all but ending Bernie Sanders’ hopes of winning the Democratic nomination, did not have a positive effect on risk sentiment.
All three of the major U.S. stock market indices futures dropped on Tuesday evening as the Nasdaq, Dow Jones and S&P 500 all shed more than 2% as wild volatility continues to reign.
In commodity markets, there was a slight risk-on tone, as the price of gold dropped 0.1%, and crude oil continued to rally, rising almost 4% to $35.50 bbl. Rising energy prices came despite news Saudi Arabia would be pumping oil above its sustainable capacity .
Currency markets painted a different picture as the safe-haven Swiss franc and Japanese yen surged as the Dow futures tumbled. The catalyst for the weaker U.S. dollar may have been a modest sell-off in treasury yields , as the money flowed back into bonds.
Digital asset bitcoin was mostly unmoved but continues to struggle below $8000 as it too has struggled in a risk-off environment.
The big political news on Tuesday evening was Joe Biden’s victory in Michigan, which along with wins in Missouri and Mississippi, have effectively guaranteed that he will be the Democratic nominee.
Despite the rather dramatic end of the Senator from Vermont’s campaign, Wall Street did not appear to be too enthused that it’s public enemy No.1 had been defeated. If anything, the sell-off in stock market futures intensified as the extent of Biden’s win in Michigan became apparent.
There are a couple of possible explanations for this.
Firstly, it is possible that the Dow Jones has already priced in a Biden victory, and the sell-off was more to do with re-tracing an overenthusiastic Trump stimulus-related bounce.
A more compelling argument can be found in the detail of the results, as Biden won Michigan by garnering the votes of the vital union demographic . This group helped Bernie Sanders win this primary in 2016, and then Donald Trump in the general election.
Given that Michigan will be a vital state for Biden to win in the general election, the national polling that suggests the former Vice President should comfortably beat Trump in a general election looks vindicated.
Joe is showing strength in the areas his supporters hoped he would, suggesting he might be Trumpian kryptonite after all.
Investors up to this point have been unanimous that the aggressively pro-deregulation Trump administration will win a second term. It appears that if the reaction in Dow futures is anything to go by, some bearish re-pricing is taking place in the stock market.
Outside of the Democratic primaries, it was Donald Trump’s proposed stimulus package that looks to be worrying investors in the Dow Jones, as it appears there is no real plan in place.
A payroll tax cut is the significant stimulus measure in play, but the President did not even show up to the meeting after promising “drastic actions” the day before. Even Larry Kudlow did not appear ready to commit to it, as there is no room in the already ballooning budget.
All this does not help a nervous Wall Street, which is looking for leadership, not big words.
As Italy and Germany deal with severe outbreaks of the coronavirus , Dow bulls want to see that COVID-19 can be contained without an overly aggressive response like China’s, as Bank of America told CNBC ,
The surge in cases outside China has heightened our concern .. The impact of Italy’s actions on the spread of the virus will tell us a lot about the ability to contain the virus without an aggressive police state.
All this being taken into account, it is looking like another rough open for the Dow Jones on Wednesday morning.