Stimulus hopes drive rebound

We're seeing a strong fightback in European stocks on Wednesday and the US is seen adding to Tuesday's gains on the open.

It's interesting to see risk appetite going full 180 since Monday when panic was spreading around the prospect of stricter restrictions, even lockdowns, in the final months of the year. The situation hasn't exactly improved in the last 48 hours; in fact, PMIs from across Europe this morning only cement fears around the economic toll of the rising Covid numbers and restrictions that inevitably follow.

Resilience in the manufacturing sector is being more than offset by inactivity in services, with the composite number slipping far more than expected and only barely remaining in growth territory. The economic recovery was better than expected but short-lived and the next few months aren't going to get any better. Another recession may be on the cards.

The only upside as far as markets are concerned is that more stimulus won't be far behind. This was certainly the message on Tuesday from Fed Chair Jerome Powell and Treasury Secretary Steve Mnuchin, although the fiscal side of the equation is proving problematic and may not come until after the election. A lot of damage can occur in the interim.

Perhaps that will put more pressure on the Fed to use its powers and newly agreed framework to shore up the economy in the coming months. The central bank has already done an extraordinary job in doing so since March but with the economy likely to struggle in the months ahead, additional support may be warranted and that has been generous to the stock market in the past.

Oil swimming against the tide

The rebound in risk appetite today is lifting oil prices a little but it's already faces stiff resistance. A rally in oil may feel like swimming against the tide in the near-term, with rising Covid cases and restrictions likely to weigh on economic activity and therefore demand. Barring another intervention from OPEC+, which is looking increasingly likely at some point, the path of least resistance is downward. And with the dollar shaking off the remaining bears and hitting two months highs, the headwinds are only growing.

Gold facing significant downside

The near-term outlook for gold is looking worse by the day, with the yellow metal breaking $1,900 just as the dollar hits a two month high, taking out key resistance along the way. The bear-case for the yellow metal has been building for some time, with the dollar threatening a correction but just failing to gain the momentum at the right time. Now that it appears to have gathered that support, gold could retreat much further, with $1,860 the next test but $1,800 perfectly feasible.