This week is all about Payrolls and Presidential Debates. But political malevolence and the torrent of global pandemic concerns continue to rattle investors' nerves.
The doomy mood music's soundboard remains tuned to growing concerns about rising Covid-19 case counts and whether policymakers have ammunition to react. In the US, this has centered on whether further fiscal stimulus might be forthcoming before the election.
But lingering optimism around a US stimulus package is getting offset by rising Covid concerns, with UK lawmakers taking a frightful economic step back into the Covid abyss by possibly enforcing tighter lockdown restriction in Northern Britain, and maybe London.
Still, it’s de rigueur for investors to dive into tech stock as another quality Covid hedge. And why not? The greater the risk of more draconian stay at home measures only increases the use of internet technology.
And while concerns around renewed Covid-related restrictions should give investors more than enough reasons to move to the sidelines, there are no signs of meaningful de-risking or hedge protection trades in the SPX as AAPL continues to set a favorable tone – but not a positive outlook for global healthcare concerns. Still, the former continues to provide final proof as US equities are boosted by tech amid virus concerns.
APAC has seen more signs of de-risking and crowded stock selling ahead of China’s Golden Week holiday, and the holiday could perhaps sideline more local investors.
Northbound connect has seen significant outflows by foreigners from the China A-share market, with the leading baijiu names at the top of the selling list. Southbound investors extended selling in Meituan, Tencent and Xiaomi, though others looked to bottom fish Tencent. The reaction to seeing HSBC testing multi-decade lows was to short a multitude of large HSBC shareholders, rather than bottom fish.
The importance of fiscal stimulus in supporting ultra-accommodative monetary policy in the US was a message pushed by a plethora of Fed speakers last week. The Democrats expected to release a new version of the coronavirus relief package shortly. Still, reports suggest this offer will remain far from what the White House is prepared to accept.
In the meantime, fiscal-driven concerns around the economic outlook could keep equity and commodity markets under pressure. The 7.9% drawdown in the SPX marks the ninth largest selloff since early 2010. The current drawdown is conceptually similar to the ~10% selloff in January-February 2018 driven by global growth concerns. The longer it takes for consumer end-demand to recover, the greater the need for fiscal support if markets judge central banks as pushing on a string.
The presidential debate (September 29) marks an important risk event for markets.
Prediction markets are pricing in a Biden presidency (57%), echoed in the latest polls, where he holds a +7pp average lead. Biden's lacking in the debate could undermine risk sentiment (lower equities, stronger USD) via two primary channels. First, prospects for fiscal stimulus early in President Trump's second term are lower than under a Biden first term, even with Congress split between the two parties. Second, investors will price in more unpredictable foreign policy, a risk that has diminished in recent weeks, judging by the selloff in USDCNH.
The main political protagonists will be pinning their views on their lapels for all to see. But for the market’s concern, the challenge is less about who wins and more about how narrow the victory could be, resulting in a contested election and leaving the market in congressional gridlock at a time when government support is critical.
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