Global markets are grappling with the notion the global economy’s rebound may not be quite as robust as previously assumed.
Ructions in US politics are hitting the market from multiple angles. While another wave of COVID-19 infections throughout some of Europe’s largest economies has provided another sobering reminder that defeating the pandemic is no simple task.
The death of US Supreme Court Justice Ruth Bader Ginsburg further complicated a US political environment already fraught with danger, and fed the notion a fresh stimulus package for the US economy won’t pass through congress before the election.
At that, the market is still pricing in a tight and hotly contested US election, which – if judging by what’s being implied in the US VIX futures curve – will result in a Joe Biden Presidency, and an election result that will end up contested in the courts.
Judging by market activity, the chances of a steady improvement in the US economy, along with a global economic rebound that would see a bridging of the gap in economic performance between the US and the rest of the world, has progressively diminished.
It’s led to a market dynamic whereby risk-appetite has been quashed and a desire for safe-haven assets is grown.
Stocks were down for the week across the globe, with the benchmark S&P500 declining for the fourth straight week last week – though an apparent bet on the “stay-at-home” trade saw US tech stocks arrest their recent correction.
Bond yields have dropped, and the US dollar surged, driven by the unwinding of what had become a very crowded long euro/US dollar trade.
The Greenback’s recovery, coupled with a decline in real yields, as the falling probability of an imminent US fiscal package led to a repricing of inflation expectations, catalysed a 4.6 per cent drop in gold prices for the week.
Somewhat paradoxically, the turn in global market sentiment may have proven a little tailwind to local stocks last week, overall.
The ASX200 was an outlier in global markets, rallying 1.7 per cent over the course of the week, largely owing to a 3.7 per cent drop in the Australian dollar to the US dollar.
Partly due to the increase in downside risks to the growth outlook, the Australian dollar also found itself dragged down after a speech by RBA Deputy Governor Guy Debelle, along with a big October rate cut call from Westpac’s Bill Evans, drove expectations of imminent monetary policy easing from the RBA.
Market participants will remain in the grips of concerns about US politics and the pandemic in the week ahead.
However, there’ll be some big ticket items on the economic calendar this week that will play into this broader market narrative.
The US Non-Farm Payrolls numbers will take the cake, with the market economists tipping, if not fearing, that the pace of the US labour market recovery is slowing down.
Purchasing Managers Index (PMI) figures out of the US and China will also garner attention, with the latter to be watched closely by local traders, as Australia’s economic recovery continues hinge on a sustained rebound in Chinese business activity.
Local data will be relatively light. However, with the budget and the next RBA meeting only a week away, speculation will be rife regarding what shape and size the next round of stimulus from the Government and the RBA may take.
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This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG. Information is of a general nature only.
Source: Thanks smh.com