By Deepta Bolaky
Amid the current prevailing uncertainties, global risk appetite will likely remain fragile as investors have more reasons to stay cautious:
Global equities might be poised for the first month of losses since the freefall in March triggered by the pandemic. The stock market went under heavy selling pressure throughout most of last week as a risk-off environment prevails.
On average, the month of September has been the worst month for the stock market. After an impressive rally in the last few months, investors kicked off the month with a rout in the technology sector and have struggled to find optimistic reasons to push global equities higher.
The stock market went on a wild ride with major swings between gains and losses. Major US equity indices have retreated by more than 1.5% on four occasions since the end of August:
The most-waited political event of the year is fast approaching. In modern times, history has shown that an incumbent President has a clear advantage and usually wins re-election. The last president to lose re-election was George W Bush which was mostly due to an economic recession. COVID-19 has changed the odds and investors will be closely monitoring the Presidential debates.
In a pandemic-induced environment, markets are in a need of more fiscal support from the government. The Fed Chair Jerome Powell has also repeatedly emphasised on the importance of fiscal stimulus to support the economy.
Amid a stimulus gridlock, the presidential debates have the potential to bring more volatility to the markets.
Heading into the election year, the US President was confident that its hard stance on China and a thriving US economy with a historically strong labour market and greater economic security will be the focal points of his election campaign. However, the US economy contracted due to the various forms of lockdown amid the pandemic.
The employment data scheduled to be released this week will be of utmost importance ahead of the US election as the recovery in the labour market is still quite soft.
The Continent grapples with a resurgence of coronavirus cases heading into winter. Certain European countries and the UK imposes new restrictions to contain the virus. Investors will likely monitor the growing number of cases across Europe with particular attention on France and the UK.
In the FX space, the US dollar made a solid comeback amid a broad-based risk-off sentiment, rising number of coronavirus cases in Europe and UK and a rout in the technology sector. The US dollar regains its safe-haven status and appreciated against all the G10 currencies last week.
As a risk aversion environment continues to prevail, we expect the US dollar to remain steady and solid against its counterparts. As Europe grappled with a second wave of an outbreak which is giving rise to further lockdown restrictions, the shared currency will likely remain under pressure. Similarly, the Pound will stay underpinned by the virus fears and Brexit woes.
On the economic front, aside from the NFP data, attention will be on consumer confidence, business climate and Retail Sales figures to gauge consumer spending and patterns.
After a tough start due to a stronger US dollar and mixed weekly oil reports, crude oil prices recovered some ground towards the end of last week. With the uncertainty on the demand outlook, traders will likely rely on crude oil inventory reports for fresh trading impetus.
Since August, the XAUUSD pair has been trading within a range as investors digested some positive vaccine updates, improving economic data and easing lockdown restrictions. With a stronger US dollar and a lack of fiscal stimulus in the US, the XAUUSD pair is struggling to firm to the upside despite the geopolitical and economic uncertainties. The XAUUSD pair plummeted below the key psychological level of $1,900 last week.
Even though gold may be poised for further downside dragged by the strengthening dollar, the precious metal remains at elevated levels.
Traders are to keep monitoring geopolitical headlines, central banks decisions, inflation levels, and leading economic data for fresh trading impetus.
By Deepta Bolaky
|Tuesday, 29 September 2020
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