The Week Ahead: Covid-One flip-flops.

There’s so much going on in the markets currently, it seems that every day the wires are hit with conflicting headlines. The crossfire of further regional lockdowns (definitely not national ones) battles with frantic updates about vaccine tests and results. Brexit deadlines loom ever closer (or do they?), while the most surreal US Presidential election in history is not far away, with the compelling drama that can only unfold when aformer reality television star is struggling to not become a one-term Commander-in-Chief. 

In the last one hundred years, you can list the number of US Presidents who have failed to win a second term on one hand. After the most volatile and unseemly television debate ever seen, the election mood has shifted towards a clear Biden victory with President Trump now lagging behind his Democratic challenger by 14 point in some national polls. A clean sweep victory without having to win any toss-up states would unfreeze Congress and potentially see big spending plans. But along with a multi-trillion dollar stimulus plan may come a rapid rise in inflation, while interest rates remain pegged near zero and a Fed that is still extremely careful on its exit strategy. The start of this reflation trade has been simmering for a while but really kicked off at the start of the week with bond yields rising and the US 30-year Treasury surging higher above its 200-day Moving Average for the first time since March 2019. 

However, this narrative was turned on its head firstly by President Trump’s usual modus operandi, when he tweeted a type of unilateral declaration that stimulus talks were over until after the election. Surely the man who cares the most about the stock market would realise that calling off much needed support for the US economy would cause stocks to tank? The fact that Fed Chair Powell had warned the day before of prolonged economic pain without additional fiscal support made matters all the more pressing. Indeed, that could leave the White House holding the can in the event of further gloomy economic news.

And just a few hours later, President Trump returned to the issue as he tried to backtrack by signalling that he would support targeted measures for small businesses and individuals. The market is viewing this as a classic negotiation tactic, and this is helping to limit how much risk can move adversely. 

All this shows we should definitely expect the unexpected in the final few weeks of this campaign, especially if the polls widen and the incumbent has to resort to more unusual tactics. The dollar’s mixed performance this week is instructive in this regard. At some stage, normal convention would see the greenback being supported as the threat of a contested result eases, but at the moment, the dollar is mildly softer on the basis of a return to risk tolerance and perhaps a less volatile international environment.