• Asian stocks mixed, US futures retreat.

  • Fiscal argument erodes investor confidence.

  • US data highlight need for more stimulus.

  • Vaccine optimism ceding to double-dip concerns.

US stocks are set to end the week on a downer, as Treasury Secretary Steven Mnuchin and Fed Chair Jerome Powell engage in a public disagreement over how US stimulus funds should be deployed. Mnuchin had asked for the unused US$455 billion from the Fed's emergency pandemic lending programme to be returned and injected into the US economy, a proposal that was criticised by the Fed.

Such frosty exchanges between the US fiscal and monetary sides of power being exposed to the public arena only further erodes the fragile market sentiment, prompting investors to adopt a cautious stance. The Dollar index remains supported above the 92 psychological level while yields on 10-year Treasuries have extended the pullback below the 1% mark.

Vaccine doubts eroding investor confidence

Faced with the merciless pandemic that has triggered a late-night curfew in California and school closures in New York, markets have now come upon yet another fork in the road to recovery. Investors are awaiting signals on whether to revert fully to the pandemic-era playbook of sticking with lockdown beneficiaries such as tech megacaps or press on with the rotation play which is underpinned by expectations of an incoming Covid-19 vaccine and a fresh round of US fiscal stimulus.

But the euphoria surrounding the vaccine is dwindling fast, as investors are still left to decipher the duration and the extent of the vaccine's effectiveness. Amid this void of critical information, biotech stocks are losing some of their mojo, while pandemic-era stalwarts are returning to the fore.

US political impasse dampens market mood

Keep in mind that the Democrat's agenda is on a knife edge, pending the pair of Senate runoffs in Georgia in January. It remains to be seen whether the new President can gather enough political mass to push through his policies, including a larger stimulus package. In the meantime, the political stalemate is depriving the US economy of a much-needed boost, which in turn is denying riskier assets a clear mandate to push even higher.

Note that the latest weekly reading on initial US jobless claims came in worse than expected at 742,000, which is still more than three times higher than pre-pandemic levels. The stubbornly high jobless data, coupled with the underwhelming October US retail sales data which was released earlier in the week, compound concerns that the US economic recovery is stalling.

Given the uncertain timeline before we can see a world that's vaccinated against Covid-19, coupled with persistent fears of a double-dip recession in major economies, means global investors would indeed do well to brace for a dark winter and take care not to slip on the icy path ahead.

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