At least for now anyway!
Risk appetite turned a tad sour today with stocks falling in Europe and Wall Street also pulling back, causing the dollar to rise against foreign currencies and gold. With the euro coming under a bit of pressure, it looks like the deteriorating COVID situation in Europe, as well as investor realisation that US stimulus might be delayed further, is discouraging the bulls to step in at these lofty levels today.
Investors are reluctant to bid the markets further higher after a big rally just the day before, with a growing number of analysts warning that the current economic climate does not justify company valuations at these levels, especially on Wall Street.
But ignoring today’s weakness, investor’s insatiable appetite for risk remains largely intact since the markets bottomed out in March with just over two weeks to go until the US presidential election. It is very difficult to bet against what has become a very strong trend for stocks, with central banks happy to keep the supply of money flowing into the financial markets.
Thus, traders need to be wary of acting too aggressively on their bearish views, as the longer-term momentum is still positive, and will remain that way until when the major indices show clear reversal signals. Dip buying continues to remain the dominant strategy.
Today’s slight weakness for US stocks have come on the back of another bullish session on Monday when technology shares led a sharp rally on Wall street. At the time of writing, US indices were still holding onto a bulk of yesterday’s gains, even as JPMorgan and Citigroup shares gave up their pre-market gains after topping their earnings expectations.
Technology shares will be in focus after the big rally on Monday and ahead of Amazon’s Prime and Apple’s key event, with the latter expected to unveil 5G iPhones.
Investors will also be keeping an eye on the race for the White House, with some political analysts predicting that the race could tighten. Democratic challenger Jo Biden is in the lead according to most opinion polls. However, incumbent Donald Trump hit the campaign trail with renewed energy after recovering from Covid-19.
Many investors will be asking themselves how the financial markets are going to behave in the runup to November 3. Will the dollar strengthen or weaken against other currencies? Will US stock markets gain or tumble? How would you position yourself while keeping an eye on risk?
Well, judging by the price action on the stock markets over the past few weeks, it looks like investors are betting that whichever party wins, government spending will increase regardless. This will either be in the form of a large stimulus programme under the Democrats, or indirectly via tax cuts under Trump’s Republicans. So, the fact there is a stalemate over a new stimulus package, this has partially shrugged it off. Speaking of which, significant changes must be made to Trump's proposal on Coronavirus relief, is what Democrat’s Pelosi has said today. Pelosi added that she remains hopeful that the Trump administration will finally join them to recognize the needs of the American people, rather than worry about the stock market.
But are investors under-pricing the risks facing the equity markets? As well as other risks, investors have been ignoring the rapid increases in COVID cases in this second wave of the infections. Many countries have been hit with new daily records of coronavirus infections, prompting governments to introduce new restrictions to ease the infection rate. However, investors have so far decided to keep buying risky assets, presumably because they believe that the new wave of infections would not materially change the economic outlook. But if deaths among Covid patients start to rise sharply again, then that trend could change abruptly.
Source: ThinkMarkets and TradingView