Stimulus hopes fading

European stocks are under heavy pressure on Thursday and US futures aren't far behind as near-term downside risk scenarios start to play out, dragging on investor sentiment.

One was inevitable; the dreaded second wave of Covid that's forcing governments to impose more restrictions and choke off the economic recovery just as it takes hold. Europe is being particularly hit at this point and the restrictions are becoming more severe, the next few months will be terrible for many businesses. With London heading for Tier two restrictions this weekend, hospitality in the capital is going to get walloped once again.

The second was extremely avoidable but after months of talks, the Democrats and Republicans still can't agree on a critical support package that could make life very hard for businesses and households in the coming months. Steve Mnuchin's admission that a package is unlikely before the election was a blow to the markets, one they're struggling to pick themselves up from.

Of course, no stimulus before the election doesn't mean none at all, in fact it could be much larger if, as polls suggest, Democrats enjoy a clean sweep in the election. But a lot of damage - some irreversible - could occur in the interim, it's far from a desirable outcome.

Earnings season continues and Goldman Sachs followed JP Morgan in releasing knockout earnings on Wednesday. Broadly speaking, it's been a mixed bag so far and while loan provisions and trading have been areas of strength, neither can be banked on going forward. Market volatility may continue in the short-term but isn't sustainable for much longer and the world is moving closer to lockdowns again so more provisions may be needed.

Traders optimistic of Brexit deal, at some point

Did anyone really think we were going to have a Brexit deal by today? We've been here so many times before over the last four years and the result is always the same. It wasn't a "deadline" at all, rather a target. Now leaders appear to have agreed that talks can, in fact, continue for a few more weeks afterall in order to get to the bottom of the remaining issues - the same that have been discussed for months - fishing, level playing field and governance.

I remain confident that common sense will prevail (or is that hopeful?) and a deal reached following some eleventh hour compromise. The difficulty is determining when the actual eleventh hour is and how much longer we have to endure all of the nonsense in the interim. Still, traders seem to share my confidence which hasn't always been the case over the last four years. Sterling is a little softer today but broadly speaking doing well under the circumstances. Considerable risk remains to the downside if talks do collapse.

Risks tilted to the downside for oil

Oil prices are sinking on Thursday after enjoying another positive session yesterday. Inventory data was positive for prices on the face of it but given the impact of Hurricane Delta, I'm not sure there's a huge amount to take away from it. And I'm not sure it warrants the continued support we're still seeing in prices, despite today's large declines.

This is still an environment that's very unfavourable for oil prices and with increasing restrictions being imposed across Europe and probably following shortly after across the pond, the demand picture is not looking great. Perhaps I'm missing something but I struggle to see oil managing to hold on at these levels unless a stimulus package in the US is somehow struck ahead of the election. Even then, the risks remain tilted to the downside medium term, barring another OPEC+ intervention.

Gold content around $1,900

Gold is lingering around $1,900 once again and seems content to hover around this level and wait for the major risk events to pass it by. The next few weeks could see many of these resolve themselves and could be very positive for risk appetite if they unfold as you'd expect.

The challenge for gold and other risk assets is that we live in a very unusual time, one when very little seems to go to plan. And the downside risks are considerable.