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Stock gains could be temporary; Risk appetite buoyed by US fiscal stimulus talks

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By Han Tan, Market Analyst at FXTM

Asian stocks and currencies are set to enjoy some relief before the end of the trading week, taking their cue from Wall Street’s advances on Thursday. US and European equity futures are pointing to gains at their respective opens, while the Dollar’s hold of the 94.0 handle is keeping Gold prices subdued below the psychologically-important $1900 line.

Equity bulls may be drawing comfort from reports that Democrats in Congress are drafting a $2.4 trln stimulus plan, while Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi have hinted their respective willingness to return to the negotiating table. While such signals are translating into a slight lift for risk assets for the time being, this upward pressure may prove fleeting.

At this juncture, it appears unlikely that Republicans have the appetite for a large package or even that the next round of fiscal stimulus would be passed before the November 3 elections, despite the Fed’s exhortations that the government has to do more to help the US economy get back on its feet. The absence of more support for the US economy would drastically disrupt its recovery momentum, especially in the next quarter; a risk that investors are certainly aware of.

Overall, risk sentiment is still raw after investors had to bear witness to the steep declines in US equities this month, as benchmark indices are set to post their first monthly loss since March. Although the Volatility Index (VIX) appears relatively tame compared to the spike earlier in the month, market participants must remain vigilant and brace for potentially more volatility over the near-term.

The week ahead may be fed via the political channel, as President Donald Trump and Democratic challenger Joe Biden engage in the first US presidential TV debate. With just over five weeks until the elections, market participants are going to be increasingly politically sensitive in the lead-up to what is shaping up to be one of the most fraught battles for the White House in many a year.

And the spectre of political uncertainty may not end immediately after polling day.

The fact that Republicans had to vow to uphold a peaceful transition should they lose the November vote, indicates that the risk of a delayed election outcome is weighing heavily on the minds of investors. This suggests that significant gains for risk assets may not be assured until such a scenario is no longer a threat, leaving the tendency to book profits and pare down risk exposure as a potentially attractive proposition in the interim.

 

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