By Deepta Bolaky
After a wild last week where markets swung from risk-on to risk-off sentiment following the back and forth chaos on stimulus, the attention is expected to remain highly geared towards the US election outcome.
Risk sentiment will likely remain fragile on US stimulus negotiations, US election outcome, Brexit negotiations and various forms of lockdown restrictions.
As per recent polls, former Vice President Joe Biden maintains his lead over President Donald Trump in the presidential race. The incumbent President is mostly falling behind because of his handling of the coronavirus pandemic. Market participants are thinking that a contested US presidential election is becoming less likely fuelling expectations of a Biden win and a unified government.
The US stock market has remained underpinned by the stimulus gridlock as investors note that more can only be done through fiscal support following the Fed’s recent comments. Under any presidential campaign, tax policies are the primary factor for the markets because of its direct impact on corporate valuation. The Republicans are supposedly considered as more “market-friendly” compared to Democrats.
However, we have seen that there are higher market returns under Democrats as both the combination of higher taxes and government spending stimulate the economy and support the markets.
Source: Source: MacroTrends
In a pandemic induced environment and leading up to the election date, the primary concern is about the stimulus package. It is becoming more and more unlikely that the Democrats and Republicans are going to agree on a big COVID-19 relief package before the election. There are growing hopes that a decisive Democratic win will bring greater stimulus which will boost stocks. However, investors will also likely monitor whether Republicans stage a comeback ahead of the election date.
The Commission on Presidential Debates has cancelled the 2nd Presidential Debate after President Trump refused to participate in a virtual debate. The next debate will likely be on October 22nd – the third and final debate before the election date. The US President plans to still go ahead with in-person events despite still being potentially exposed to the virus.
The third-quarter US earnings season will kick off this week with major US banks. Investors will be able to see the performance of the banks in an era of low-interest rates.
Europe sweeps a second wave that is prompting leaders to reimpose various forms of social distancing measures and lockdowns. Investors are likely to monitor the resurgence of the novel coronavirus and the measures being taken to gauge the severity of the lockdowns again.
In the FX space, major currencies were stronger against the US dollar which was under heaving selling pressure towards the end of last week. The hopes of stimulus have tamed down the demand for haven currencies.
While the price action will likely remain driven by news on the stimulus front, Inflation and Retail Sales figures will be widely eyed to gauge the Fed’s on hold stance.
The Antipodeans held their ground against a weaker US dollar. After the losses made following the RBA statement and the Budget, the Aussie dollar found some support on some upbeat data and the financial stability review. Ahead of the Budget, the RBA kept interest rates unchanged at 0.25% despite earlier calls for a rate cut.
The New Zealand dollar lagged against its peers, dragged by dovish comments from the RBNZ’s official that the central bank is actively looking into negative OCR. We expect the Antipodean currency to remain at the broader sentiment of the markets.
As the deadline looms, market participants will monitor the intensive Brexit talks. We expect the Pound to remain highly volatile driven by Brexit headlines and the rising number of cases in the UK.
The improvement in risk sentiment and Hurricane Delta brought some relief in the energy market despite much uncertainty on the demand outlook and bearish oil reports. As of writing, WTI Crude oil (Nymex) and Brent Crude (ICE) were trading around $40.08 and $42.28 respectively.
Besides the usual weekly oil reports, the most relevant event for the energy markets this week will be:
Last week, the precious metal caught a breather on a weaker US dollar and the latest update on the US stimulus package. Gold traders will likely eye the stimulus talks and US election developments for fresh trading impetus.
By Deepta Bolaky
|Tuesday, 13 October 2020
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