The week ahead: Three things that don’t include the US election

Find out why gold may lose its lustre, and what to look out for that is not the US Presidential election. 

 

The week has started on a positive note, with stock markets across Asia, Europe and the US all rising on Monday. The S&P 500 rose 1.8%, and it has now clawed back 50% of its September losses, the index is now at its highest level since mid-September. The Nasdaq 100 is up more than 2% on Monday, however, so far, its recovery has lagged the broader S&P 500 index, and it has not yet managed to recover 50% of its September losses. Ebbing political risk was the main driver of the stock market recovery at the start of this week.

 

 

Financial markets, particularly in the US, remain sensitive to political risks right now. At the end of last week, the main risk was President Trump’s health. This week’s market rally gathered pace once we heard that President Trump is set to be released from hospital following his positive Covid-19 diagnosis later on Monday. This has settled investors’ nerves after markets swooned last Friday on the back of Trump’s positive test result for Covid-19. This gives hope that the Presidential election campaign can proceed as normal and that next month’s election should be able to go ahead as planned. This brings us to the second political risk, the US Presidential election outcome. The latest poll, which includes the period after Trump’s covid diagnosis, shows that Democrat Joe Biden has a 14% lead over Trump, one of the widest leads that he has held since the start of the campaign. While there are some concerns about what the Democrats could do with taxes, there is hope that a Democrat in the White House could expediate a fresh round of economic stimulus. In this environment, economic stimulus means more than tax cuts, thus a widening lead for Joe Biden, with less than one month to go before the election, could give the stock market recovery a boost. 

While the US Presidential election is likely to dominate the news cycle in the coming weeks, there are other events that could also be market-moving. Below we choose our top three picks.

1. The FTSE 100 and the pound: the index has lagged behind the recovery in Europe and the US at the start of the week. At the same time as the FTSE 100 is struggling to keep up with its global peers, GBP/USD is testing $1.30 again. While the pound is getting a boost from the pause in the dollar’s rally, UK stocks are struggling under the weight of a resurgent pound. We believe that the future direction of the pound will hinge on the progress of trade talks between the UK government and the EU. At the start of this week the tone between the two sides has improved. Boris Johnson had talks with EU chiefs at the weekend, and both sides are discussing fisheries, which has been a major sticking point in the negotiations. We continue to believe that the two sides will hash out the bones of a trade deal in the next couple of weeks, which could be pound positive. However, a strong pound could weigh on the FTSE 100. Added to this, we could see stronger economic data have a larger impact on the pound than the FTSE 100. This was the case on Monday, when a better than expected services sector PMI for September also drove the pound’s strength. To conclude, we are looking for pound strength from any positive signs that a trade deal between the EU and the UK is forthcoming. 

2. Gold and US stocks: Is the world over gold yet? After breaking above $2,000 per ounce, it fell sharply from August until the third week of September, and since then it has embarked on a recovery. However, that recovery is looking fairly tepid. Gold may try to take the $2,000 level once more, but if it is rebuffed again then we may see a steeper sell off. That’s the trouble with gold, it rallies for long periods and then sells off for long periods. The long-term gold chart is full of peaks and troughs, unlike the long-term chart of the S&P 500, which shows that, over long periods of time, stocks mostly rise. This is why we think that some unloved US stocks, in the retail and energy sectors, could drive a broader US stock market rally in the coming months. Part of this rally could be driven by investors moving out of gold, which looks expensive, and into undervalued sectors of the US stock market. Even with more economic stimulus and the Fed’s new policy to allow higher rates of inflation to go unchecked, we don’t think gold will be needed as an inflation hedge for many years yet. This could erode gold’s allure in the coming weeks and months. 

3. The ECB and the euro: The second wave of Covid seems to have hit Europe’s economies harder than the US and the UK, if you look at the relative performance of their service sector PMIs for September. This makes the ECB’s relatively sanguine view of a strong euro and its fairly hawkish stance at its last meeting seem odd. The ECB President has the chance to put this right when she speaks on Tuesday at 1pm GMT. She may use this as an opportunity to prepare the market for a boost to the ECB’s bond-buying programme later this month. If that happens then we believe the euro could be in trouble vs. the USD and GBP. EUR/USD has staged a decent recovery in October after September’s declines. However, a dovish Lagarde could change that and see EUR/USD retrace its steps back towards the $1.1610 lows from the end of September. EUR/GBP has been grinding lower for most the last month, £0.90 is key support followed by £0.8860, the low from 3^rd September.