By Han Tan, Market Analyst at FXTM
A wave of risk-off sentiment swept through financial markets after US President Donald Trump tweeted that he and First Lady Melania Trump have both tested positive for Covid-19 and will go into quarantine to begin their recovery process.
US and European equity futures, along with Asian benchmark indices, all sank on the news. The Japanese Yen surged by as much as 0.68% to hit its strongest level in over a week against the US Dollar, dragging the Dollar index (DXY) back below the 94.0 level.
This surge in political uncertainty comes just a month before the November 3 presidential elections, adding to the plethora of concerns that investors are already contending with. This could potentially weigh on the political will to reach an agreement over the next round of US fiscal stimulus, while pushing the Trump administration’s handling of the pandemic front and centre in the election campaign.
Given this added layer of uncertainty, a growing sense of risk aversion could dominate market sentiment until there is further clarity about the President’s health response to the coronavirus.
In the meantime, investors will also continue to assess the latest developments surrounding the pandemic’s impact on the world economy.
Given that several major countries are still struggling to get a stranglehold on the coronavirus spread, the world’s journey into the post-pandemic era is destined to be bumpy. This suggests that more support measures, beyond the $20 trln that have already been rolled out, are needed for the global economy to move closer to pre-pandemic levels.
With the prospects of a pre-election breakthrough still up in the air, equities may unwind more of the gains accumulated since March if investors are resigned to the fact that the much-needed financial support for the US economy may not arrive until after the November election. The spectre of protracted political uncertainty, via a potentially delayed outcome to the election, may also serve as another wet blanket over risk appetite in the weeks ahead.
Investors who are driven by fundamentals are also set for the September US non-farm payrolls report later Friday, with markets currently expecting a print of 875,000, which would be the smallest amount of jobs added in a month since the world’s largest economy began reopening in May.
Although Thursday’s weekly jobless claims registered a better-than-expected figure, the data shows that unemployment in the world’s largest economy remains doggedly high. There are also growing concerns that more of the temporary layoffs could become permanent.
The job market’s recovery momentum is stalling noticeably, which in turn underscores the pressing need for more fiscal support.
A marked slowdown in job gains could also dampen expectations over faster US inflation. Until more fiscal aid arrives, the DXY could remain within the 91.8 – 94.8 range it has been trading in since late-July, with further support stemming from the political uncertainty leading up to next month’s election.
A well bid Dollar in turn is set to keep Gold’s upside in check, until investors can also get a better handle on how exactly the Federal Reserve intends to juice up US inflationary pressures.
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