Stock markets are slightly negative on Wednesday as investors weigh up the latest developments across a range of major risk events.
Sentiment was knocked on Tuesday when stimulus talks once again stalled in Washington, with the two sides seemingly no closer to an agreement on much needed support. I struggle to see these differences being overcome before the election, the only comfort being that the Democrats are in a good position for a clean sweep, meaning any package could be larger again. But at what cost in the interim.
There hasn’t been great news this week on the Covid fight either, with more restrictions being imposed across Europe, J&J pausing its vaccine trials after a participant fell ill and Eli Lilly halting clinical trials of its antibody treatment over a safety concern. The latter two may prove temporary, similar to AstraZeneca and many other trials over the years, while the former is a major concern heading into the winter.
Investor sentiment is proving very resilient against this backdrop, perhaps driven by an unwavering belief that the next month could deliver a stimulus package, Covid vaccine, a relatively peaceful election result and a Brexit deal. That looks optimistic at the moment but equally, all of those individual outcomes are probably more likely that the alternative at this point. Some may take a little longer but all look likely. More monetary stimulus may also accompany all of this.
Earnings season is underway and JP Morgan led the way with knockout results. Lower loan provisions were probably the most promising takeaway as it may suggest the bank is more optimistic about the economy than analysts anticipated. We’ll see if that view is shared by the rest of Wall Street over the next few days and by the broader business community in the coming weeks. Goldman Sachs, Wells Fargo and Bank of America will report today.
Boris open to continuing Brexit talks after this week
This weeks deadline for Brexit talks is “shockingly” looking more like a soft deadline, after someone familiar with the talks claimed Boris Johnson is willing to continue them beyond this week. This had already been touted by the EU, with the end of the month now the firmer deadline, although as ever, no one should be shocked if that is pushed back. Especially given the lack of progress on fishing and level playing field.
Whatever the deadline, a deal still looks far more likely than not. We’re just into the latter stages of the deal making process, which given how the last four years have gone, means more brinkmanship before a compromise is reached. This is a negotiation after all. A deal should given the pound a boost but given how calm it’s been, I wonder whether it’s already largely priced in and the major risk lies below, should talks ridiculously break down.
Oil holds firm around $40
Oil prices recovered slightly on Tuesday but are under a little pressure again today. Under the circumstances, it’s perhaps surprising they’re being as resilient as they are given that much of last week’s rally was driven by temporary factors that have since resolved themselves. We seem to be edging ever closer to lockdowns across Europe which is a downside risk for oil, while US cases may pose a threat as well.
Saudi Arabia and Russia are keen for members of the OPEC+ group to abide by past output agreements in order to maintain prices at an acceptable level. The pressure we’ve seen on prices since September may force memebers to meet before December, especially if compliance becomes a broader problem.
Gold continues to hover as risk events unfold
Gold is continuing to hover around the $1,900 level, where it has been consolidating around in recent weeks. There are a huge number of major risk events in the coming weeks that should determine how it ends the year and we could just see it consolidating as we await for these events unfold.
The near-term risks are tilted to the downside for gold but sentiment has appeared to improve in recent weeks, which could make the coming sessions quite interesting. If things get worse before they get better – pandemic, stimulus, election uncertainty, Brexit etc – this could drag on gold a little more and put pressure on $1,850.
