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Stocks slightly higher ahead of big events

28 September 2020

Equity markets in Asia along with European and US futures edged slightly higher early Monday as investors grapple with many variables that could bring increasing amounts of volatility in the week ahead. The dollar gave up some gains but is still hovering near a two-month high, as rises in Covid-19 cases and political uncertainty held back investors from selling the greenback. Meanwhile, fears of weak demand kept oil prices under pressure and on track for a first fall in several months.

First US Presidential TV Debate

The war of words between President Donald Trump and Democratic challenger Joe Biden will finally move to a television stage on Tuesday. Biden continues to lead in national polls and several swing states, so the first Presidential debate will either see the contender widen his lead or Trump will close the gap.

Markets overall still prefer a Trump second term, given that corporate tax cuts will remain in place if not reduced further, but a Biden win would most likely translate into an increase in tax for corporates and high net worth individuals.

In addition to higher taxes, a Democratic sweep where Democrats continue to hold the House and take over the Senate would suggest increased regulations on the energy and banking sectors, along with more decisive policy actions on competition, antitrust and cybersecurity. However, a Biden win is expected to restore US relations with the rest of the world, especially its key trading partners like China and Europe, so that would be an initial positive outcome for global shares outside the US. 

Overall, expect stocks to remain choppy as we approach November 3, and possibly well beyond that date if Trump decides not to commit to a peaceful transfer of power if we get a Biden win.

US jobs

So far, the US economy has recovered little less than half of the jobs lost due to the pandemic and it’s going to be a very long time before there is a return to full employment. While the economy has been healing over the past several months, the pace of the recovery is showing signs of slowing.

Friday’s non-farm payrolls report will likely confirm the slowing pace of the economic recovery. Markets expect 875 thousand jobs have been added in September, down from 1.4 million in August, and well below the 4.8 million jobs added in June. A further slowdown in the recovery should push the Democrats and Republicans towards finalising a new stimulus relief package, but the two parties still seem far apart.

Brexit talks return to the headlines 

Trade talks between the UK and EU enter their final stage this week. Both sides want to avoid a no-deal Brexit especially as the European economy continues to suffer from rising Covid-19 cases. There seems to have been some concessions made over the past several days, but most important is how these concessions translate into the final round of talks.

The Pound will see a spike higher if we get closer to an agreement and they enter “the tunnel” in which the details of the deal will be drafted in secrecy over two weeks. There seems to be some positivity as we enter the final round, but traders need to be prepared for any outcome.



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