October: US Stimulus Noises and National Lockdowns

Another Volatile Month for Markets

The financial markets were rattled by another wild month driven by geopolitics and COVID-19 updates. As the month comes to an end, the rapid resurgence of the coronavirus cases across the US, European countries, India and Russia have forced some leaders to reimpose national lockdowns.

Global Equities

The back-and-forth on the stimulus relief package and Brexit negotiations, the rapid upward spiral of coronavirus cases and the uncertainty on the global economic outlook rattled the markets which forced investors to remain wary and cautious.

Risk sentiment was on and off causing wild swings between gains and losses in the stock market.

Source: Bloomberg

US: Stimulus and Election Noises & Earnings Season

In a pandemic-induced environment where second waves of coronavirus are recorded in certain parts of the world, investors are mostly concerned on the amount of stimulus being put in the financial markets to support the global economy and the expectations of a vaccine to allow global activities to resume to normal levels. Across the month, investors noted further delays in the race for a potential vaccine and a gridlocked Congress failing to put their differences aside to provide timely relief package.

The US stock market had a momentary breather every time the headlines suggested some negotiations are underway ahead of the US elections but the improvement in risk sentiment was mostly short-lived as reality kicks-in. Just days ahead of the crucial presidential election, volatility in the stock market jumped to the highest level seen in mid-June and the VIX soared to 40 earlier this week.

Major US equities indices plunged by more than 3% in the last five day. As of writing, the S&P500 was on course for its biggest-ever loss in the week before a US presidential election.

As of writing, US stocks rebounded slightly on the back of improved economic data, big tech earnings results and some buy-the-dip strategies. While volatility might be unsettling and especially given the current uncertainties, investment opportunities may still arise if investors look beyond the near-term risks.

The elections noise will eventually fade. Investors will likely concentrate on the fundamentals – the diverging fiscal policies if there is a Biden or Trump Administration, the gradual economic recovery path following the pandemic, and the liquidity coming from the central banks.

On the earnings front, the big tech leaders were at the centre of attention. As the world has gone remote forcing people to work, study, shop, and be entertained at home, the reliance on technology has become more crucial. The industry biggest players: Amazon, Apple, Facebook, Alphabet, and Microsoft were somewhat well-equipped to rise to the challenges. The resilience and performance of the tech sector year-to-date stood out this year – mega-caps tech companies have tackled the pandemic relatively unscathed by its impact compared to the economic malaise other industries are facing.

As of writing, Amazon, Apple, Facebook and Alphabet just reported their quarterly earnings after the bell. Despite big numbers, Apple, Facebook and Amazon’s share price are falling in after-trading hours.

Tech giants like Facebook, Twitter and Google were grilled by the Senate Panel and faced tough questionings on Wednesday. Those tech giants are also widely accused of abusing a dominant market position.

Europe & UK – National Lockdowns

European and UK shares have been underpinned by the second wave of coronavirus and Brexit noises throughout the month. As some European countries are set to reintroduce national lockdowns, European bourses and the FTSE 100 index tumbled and the retreats by nearly 5% and above for the month-to-date.

ASX- Australian Budget Boost

Following the release of the Federal Budget, Australian shares decoupled from the US and European stocks and rallied to a high of 6,248.30 during the month. Investors endorsed the government spending blitz which boosted Australian confidence.

Source: Bloomberg

In a stimulus-fueled economy, investors will likely keep monitoring the support coming from governments and central banks. The elections noise will eventually fade. However, we expect the daily records of coronavirus cases in Europe and the expectations of more national lockdowns to keep volatility elevated in the next couple of weeks. Investors will likely concentrate on the fundamentals – the diverging fiscal policies if there is a Biden or Trump Administration, the gradual economic recovery path following the pandemic, and the liquidity coming from the central banks.

Forex Market

In the forex market, major currencies were mixed against the US dollar. Amid an environment of caution, safe-haven currencies like the greenback, Japanese Yen and Swiss franc gained upside transaction.

Source: Bloomberg

Central Banks

In an ultra-low interest rates environment, central banks have reached their limits in injecting liquidity in the financial markets. The Federal Reserve has reiterated the need for more fiscal support over the month. The Aussie dollar is among the worst G10 currencies against the US dollar dragged by the increased bets for a rate cut and more quantitative easing.

Oil – A Dire Demand Outlook

Crude oil prices remained pressurised by the uncertainty on the demand outlook. The World Energy Outlook 2020 report released earlier this month reiterated the struggles of the energy market in the coming years:

• The Covid-19 pandemic has caused more disruption to the energy sector than any other event in recent history, leaving impacts that will be felt for years to come.
• The shadow of the pandemic looms large: “Global energy demand rebounds to its pre-crisis level in early 2023 in the STEPS, but this is delayed until 2025 in the event of a prolonged pandemic and deeper slump, as in the DRS.
• In the Sustainable Development Scenario (SDS), a surge in clean energy policies and investment puts the energy system on track to achieve sustainable energy objectives in full, including the Paris Agreement, energy access and air quality goals. 
• The new Net Zero Emissions by 2050 case (NZE2050) extends the SDS analysis. A rising number of countries and companies are targeting net-zero emissions, typically by midcentury.

As of writing, WTI Crude oil (Nymex) and Brent Crude (ICE) were trading around $36.39 and $37.90 only dragged by further national lockdowns which will hinder the rebound in oil demand.

Gold – Stimulus Gridlock

A stimulus gridlock in the US and a stronger greenback have underpinned the demand for gold. The XAUUSD pair struggled to trade around the key psychological level of $1,900. As of writing, the precious metal was trading around $1,876.

Source: GO MT4

Gold will likely remain under pressure until more stimulus and financial support are announced.