Stock gains could be temporary

25 September, 2020

Asian stocks and currencies are enjoying some relief before the end the trading week, taking their cues from Wall Street’s advances on Thursday. US and European equity futures are pointing to gains at their respective opens, while the Dollar’s hold of the 94.0 handle is keeping Gold prices subdued below the $1900 line.

Equity bulls may be drawing comfort from reports that House Democrats are drafting a US$2.4 trillion stimulus plan, while Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi have hinted their respective willingness to return to the negotiating table. While such signals are translating into a slight lift for risk assets for the time being, this upward pressure may prove fleeting.

At this juncture, it still appears unlikely that the next round of US fiscal stimulus would be passed before the elections, despite the Fed’s exhortations that the government has to do more to help the US economy get back on its feet. The absence of more support for the US economy would drastically disrupt its recovery momentum, especially in the next quarter; a risk that global investors are certainly aware of.

Overall, risk sentiment is still raw after investors had to bear witness to the steep declines in US equities this month, as benchmark indices are set to post their first monthly loss since March. Although the VIX index appears relatively tamed compared to the spike earlier in the month, market participants must remain vigilant and brace for potentially more volatility triggers over the near-term.

In the week ahead, market volatility may be fed via the political channel, as President Donald Trump and Democratic challenger Joe Biden engage each other in the upcoming US presidential debate. With just over five weeks until the elections, market participants are going to be increasingly politically-sensitive in the lead up to what is shaping up to be one of the most fraught battles for the White House.

And the spectre of political uncertainty may not end immediately after polling day. The fact that Republicans even had to vow to uphold a peaceful transition, should they lose the November vote, indicates that the risk of a delayed elections outcome is weighing heavily on the minds of investors. This suggests that significant gains for risk assets may not be assured until such a scenario is no longer a threat, leaving the tendency to book profits and pare down risk exposure as a potentially attractive proposition in the interim.

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