Forex:White-Knuckle Ride Ain’t Over Yet

Asian stocks are a sea of red while US equity futures are extending their declines for the…

Asian stocks are a sea of red while US equity futures are extending their declines for the week, as markets continue taking stock of the potent mix of major downside risks, from Covid-19’s resurgence in major economies to the looming US political uncertainty.

While Americans have been casting their votes early in droves, with an estimated 81 million votes already cast either in-person or via mail-in ballots, equity investors appear to have opted to leave it late – a mere week before polling day. Without the veneer of an imminent fiscal stimulus package for the US economy, riskier assets finally had to face up to the threat of a double-dip global recession and a contested US election outcome.

For the past six weeks, the VIX had been content staying close to its pandemic-era average of 30. Now, any remaining sense of complacency is being wrung out of investors by the market’s wild moves this week, with the VIX spiking above the psychologically-important 40 mark, before moderating amid Thursday’s rebound. Still, with US futures pointing to further losses at the Friday open, the VIX could end the week above this level if today’s session mirrors the volatility from earlier this week.

The S&P 500 is about to post its second consecutive weekly decline, and is just 30 basis points away from matching the 4.78 percent drop registered for the trading week ending June 12th. With this benchmark US equity index set to break below its 100-day simple moving average, such a technical episode could herald further declines in the sessions leading up to the November 3rd vote, and even after. And with its 14-day relative strength index yet to reach the 30 mark, which typically denotes oversold levels, it suggests there could be more downside to be explored.

Given the very real chance of a delayed outcome to the 2020 US presidential elections, investors may opt to continue paring down their exposures to risk until there’s more clarity as to who will occupy the White House for the next four years. Over the coming days, developments pertaining to US voting trends could have an outsized influence over broader market sentiment. Should risk aversion rule the roost, King Dollar could then solidify its claim to its throne, having regained its status as the preferred safe haven asset.

Even tech stocks, which had assumed the safe-haven mantle amid the Covid-19 storm, have been found wanting of late. Big Tech now isn’t immune to this latest rout, judging by Thursday’s after-market moves, despite releasing some better than expected quarterly earnings. Without thesejuggernauts, which have been a stalwart in driving US benchmark indices’ tremendous gains since the pandemic broke out, equity bulls have little else to go on over the immediate future.

With market participants becoming increasingly harder to satisfy, traditional safe havens might be tempted to make hay over the immediate term, until the market narrative shifts positively away from the pandemic and the US elections. Perhaps headlines pertaining to fresh waves of fiscal and monetary stimulus across Europe and the US could do the trick.

In the meantime, strap in tight. This roller coaster ride isn’t quite over yet.


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