Vote of confidence for volatility

Equities, gold and oil markets will witness short-term volatility as the US presidential elections approach and Covid-19 continuing to rage again across the globe, analysts say.

Some economists predict that Democrats and Republicans are unlikely to agree on a stimulus deal before the November 3 elections that will fuel further uncertainty for markets and put pressure on the US dollar and equity markets.

MR Raghu, managing director of Marmore Mena Intelligence, said compared to past US presidential elections, a high level of uncertainty persists this time.

“Prevailing uncertainty could amplify economic weakness in an environment that is [already] challenged by the Covid-19 pandemic. A second term for President Donald Trump could lead to continued implementation of his ‘America First’ strategy, leading to continued trade wars, deregulations and tax cuts. This could be positive for oil and specific sectors in equities such as banking, financials and real estate,” he said.

“On the other hand, a Joe Biden presidency could lead to a thrust on green initiatives and infrastructure spending. A less-friendly environment for shale operations could be oil-positive event, however it could be negated by possible reconciliation with Iran.

“As we get closer to the US elections, we could expect volatility to surge as the prospects for contested election remain large. Regardless of the election outcome, factors such as lower rates for longer, unlimited quantitative easing has eroded the fundamental support for US dollar and thus could be supportive for gold.”

Roberto d’Ambrosio, CEO of Axiory Global, said as long as the distance between Biden and Trump remains wide, with particular reference to the so-called “swing states”, this will be bullish for the equity market and oil but slightly bearish for gold, especially in the US, but also attracting the performance of GCC markets.

“As volatility rises approaching the election time, there will be a lot of short-term volatility in the equity market, mostly linked to the level of uncertainty affecting the US election, which can be traded both long and short following the news or to trim the hedging level of existing equity portfolios,” he said.

As volatility rises, safe-heavens like gold and currencies like the US dollar and Japanese yen should attract liquidity from the investors as a hedge against rising risks on equities and partially oil.

With the virus biting hard and forcing governments to enforce strict measures to contain it, d’Ambrosio said equity markets are betting that the reaction to the economic pressure will be more sizeable stimulus from the authorities both in terms of subsidising entire economic sectors and provide liquidity to business and households, which has led so far to the equity market and the oil market substantially holding their positions, which is likely to continue as long as no great shock impact the market.

Simon Ballard, chief economist of First Abu Dhabi Bank (FAB), said market focus remains firmly skewed toward the prospects for the US presidential election for now. “With just over a week to go until the November 3 plebiscite, the end of last week was dominated by the second — and final — presidential debate between Trump and Biden. Trump was generally seen as having ‘won’ the debate”.

“As we have said previously, we would consider the worst outcome from the election, in terms of market impact, to be a contested result. Unless a bipartisan fiscal package is agreed this coming week, a contested election result next week would certainly scupper all stimulus plans for the foreseeable future. This would likely fuel uncertainty, a spike in risk aversion and perhaps paradoxically, renewed dollar weakness.”

“However, a record 47 million early votes have already been registered, which would seem to lessen the chance of such a contested election, but after Trump’s ‘win’ in Thursday night’s debate we would conjecture that the race could be much closer than the polls suggest.”

Ole S. Hansen, head of commodity strategy at Saxo Bank, said the US presidential election on November 3 has increasingly been pointing toward a win for Biden. In response to this, the market has adopted a more reflationary approach. “We see the potential for higher commodity prices in 2021, no matter who win the keys to the White House on November 3. Supply constraints of key commodities from metals and energy to key crops together with macroeconomic tailwinds from a weaker dollar and reflation are likely to drive commercial and speculative buying of the sector,” said Hansen.

— waheedabbas@khaleejtimes.com