US Open – Stimulus setback hits risk appetite

Stimulus hopes fading

European stocks are under heavy pressure on Thursday and US futures aren’t far behind as near-term downside risk scenarios start to play out, dragging on investor sentiment.

One was inevitable; the dreaded second wave of Covid that’s forcing governments to impose more restrictions and choke off the economic recovery just as it takes hold. Europe is being particularly hit at this point and the restrictions are becoming more severe, the next few months will be terrible for many businesses. With London heading for Tier two restrictions this weekend, hospitality in the capital is going to get walloped once again.

The second was extremely avoidable but after months of talks, the Democrats and Republicans still can’t agree on a critical support package that could make life very hard for businesses and households in the coming months. Steve Mnuchin’s admission that a package is unlikely before the election was a blow to the markets, one they’re struggling to pick themselves up from.

Of course, no stimulus before the election doesn’t mean none at all, in fact it could be much larger if, as polls suggest, Democrats enjoy a clean sweep in the election. But a lot of damage – some irreversible – could occur in the interim, it’s far from a desirable outcome.

Earnings season continues and Goldman Sachs followed JP Morgan in releasing knockout earnings on Wednesday. Broadly speaking, it’s been a mixed bag so far and while loan provisions and trading have been areas of strength, neither can be banked on going forward. Market volatility may continue in the short-term but isn’t sustainable for much longer and the world is moving closer to lockdowns again so more provisions may be needed.

Traders optimistic of Brexit deal, at some point

Did anyone really think we were going to have a Brexit deal by today?

We’ve been here so many times before over the last four years and the result is always the same. It wasn’t a “deadline” at all, rather a target. Now leaders appear to have agreed that talks can, in fact, continue for a few more weeks afterall in order to get to the bottom of the remaining issues – the same that have been discussed for months – fishing, level playing field and governance.

I remain confident that common sense will prevail (or is that hopeful?) and a deal reached following some eleventh hour compromise. The difficulty is determining when the actual eleventh hour is and how much longer we have to endure all of the nonsense in the interim.

Still, traders seem to share my confidence which hasn’t always been the case over the last four years. Sterling is a little softer today but broadly speaking doing well under the circumstances. Considerable risk remains to the downside if talks do collapse.

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