European equities may yo-yo a bit at the open as London, and Frankfurt desks digest the overnight fiscal headlines and take a read of both the straw and media elections polls – Stock Market Analysis Today: Stimulus hopes fuel market sentiment.
But with value/cyclical names expected to continue to push on as the market chases the possibility of a significant fiscal push out of the US in 2021, traders will take a lively read for cyclical-heavy Europe (curve steepening; selling of momentum names such as tech).
While I think this trade makes a lot of sense and a Democratic sweep could well be the catalyst for some real rotation into Europe, I would exercise some caution at current levels, given how far some names have moved in a short space of time.
But any significant pullback in higher quality cyclicals will likely be bought, as the direction of news flow about a Covid-19 vaccine remains very bullish.
Rising Covid-19 cases in Europe
EU stocks will continue to be fuelled by US stimulus hopes and expectations of a “blue wave” that is currently viewed as a stimulus friendly outcome at the November US election. The recent rise in Covid-19 cases in Europe/ and tighter restrictions continued to generate lots of headlines but not much market reaction.
Indeed, the stimulus in a warped way tends to mask the market Covid-19 fears.
It looks like we will round out Asia on another positive week for global risk assets. Equities are up so far around 2% in most cases, credit tighter, and with Asia, outside of China, not doing much of anything today.
With US equity futures in the green, there is nothing to worry about, so it seems, which sees traders expecting a typical Friday session. Let’s see, but something tells me these media polls are lulling stock investors into a false sense of security.
Still, there is an elevated election risk premium embedded in US equity volatility suggesting stocks can still move much higher if the pre-election polls paint the ballot box blue.
And a potential vaccine approval will likely be an explosive event for the markets and is not yet fully priced in.
I suspect the US Fed levers are going to be a bit sticky for the rest of the year, so the market will look to float on both the stimulus and vaccine balloons until the Democrat tax and regulation policies take centre stage in early 2021 or possibly before.
The global stock markets have performed well over the last couple of days with US stimulus talks making some progress. After all, if both sides are still talking, at least they must have something to talk about.
Correlation wise, the “risk-on” effect should be good news for EURUSD bulls. But with participation reasonably low, traders are content to sit home on the range. The markets remain mired in range trading dormancy between 1.1720 / 1.1820.
But with a sharp rise in Covid-19 cases across Europe and countries imposing tighter restrictions again, I struggle to see a sustained festive mood.
Australian dollar enjoys buyer support
A more constructive picture has continued over the past few sessions with AUD printing sequential higher lows since the initial selloff into the 0.7100 area earlier in the week, as risk sentiment seemed to recover quite promptly following Trump’s stimulus wobble.
Over the past few days, the market has exhibited pockets of interest for AUD both against the USD and crosses, although our week to date flows remain somewhat more balanced.
The Pound continues to consolidate
Quiet session in Asia so far as GBP continues to consolidate overall. Demand on the European open initially emerged again yesterday, only to yield as we approached the 1.2970-80 resistance area before we eventually reverted lower once again after the Asia close. Expect choppy conditions to persist.
The vague sense of optimism regarding Brexit talks lingering in the background, perhaps providing a touch of support on dips.
But virus cases continue to climb, and with new mitigation measures about to kick in, conversely, this may weigh. With broader risk sentiment, an additional consideration, it’s perhaps understandable that conviction has been a little light of late.
Stock Market Analysis Today: Stimulus hopes fuel market sentiment