Chief Market Strategist at FXTM
Equity
markets kicked off Monday on the back foot following three weeks of consecutive
declines in US stocks, which marked the longest weekly losing streak since
2019. Investors are becoming increasingly worried about the momentum in the
economic recovery given the resurgent numbers of global Covid-19 cases and lack
of progress on a new US stimulus package.
Although
President Trump signaled his
readiness to back a bigger stimulus bill last week, the Supreme Court’s empty
seat left by the passing of Ruth Bader
Ginsburg is likely to complicate the matter. The fight between the
President and Congressional Democrats on whether to fill the vacant seat now or
wait until after the election is expected to lead to more delays in reaching a
middle ground on a new fiscal package. Hence, we would expect that the
much-needed stimulus will be pushed back until after the US elections.
Given
that the list of uncertainties is growing, especially on the pandemic front,
risk is now skewed to the downside. We have US elections just around the
corner, hefty valuations in growth sectors despite the recent correction and
the high stakes of possible national lockdowns in the UK and elsewhere all
pointing to waning momentum in the economic recovery. All these factors
indicate more volatile times for the next several weeks.
Datawise,
investors need to keep a close eye on September’s flash PMIs coming out of
Germany, France and the UK this week for further indications on how the big
European economies are faring following the strong rebound in early Q3. Signs
of weakness here will be a strong signal that the economic recovery is indeed
losing its way and further action is needed from fiscal and monetary
policymakers.
Currency
markets are not yet reflecting the risk aversion seen in equities. The Dollar
is trading slightly lower against its major peers, with the DXY -0.15% at the
time of writing. The Fed is clearly the winner among other central banks in
providing the most accommodative monetary policy, which means the long-term
projections for the Dollar remain to the downside. However, if the selloff in
US equities accelerates this week, expect the greenback to regain some support.
In
commodity markets, Brent fell by 1% after trading slightly higher in early
Asian trade. The battle between the bulls and bears is keeping prices
rangebound between $40 and $45. At this stage, the demand outlook is far more
important than the supply side. That’s why oil traders need to keep a close eye
on the trajectory of the virus, especially if it’s going to lead to renewed
lockdowns. Gold is also another commodity stuck in a narrow range as traders
await new clues on the Fed’s policy approach towards inflation. This could happen later this week as Chairman
Jerome Powell may provide new hints when he appears before the Congress on Tuesday.
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