Friday, 2nd of October 2020
“You never know what worse luck your bad luck has saved you from.”
– Cormac McCarthy
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Trump finally has coronavirus. For a man who takes so many flights, holds so many rallies, and shakes so many hands in his role as US President it was only a matter of time. But the fact that his self-isolation begins so close to the presidential election on the 3rd of November is bound to impact the race. Will the American people rally around their stricken president (and first lady) or will Trump supporters find his bombastic style less compelling over Zoom? Will Biden finally get a word in edgeways on the campaign trail or will Trump’s twitter account prove as disruptive as his physical presence? Will the Donald make a swift recovery from this disease or is he heading for the ICU – or worse? Clearly, answers to such questions are not available to those of us who have to position client portfolios ahead of the election. And news of the President’s positive test result has only added to the sense of drift and uncertainty in global markets. Of course, we have been here before. Both Boris Johnson and Jair Bolsonaro caught covid-19 and lived to tell the tale. But, today, as we stare down the barrel of winter with the pandemic already making a comeback across much of the world, the sickness at the heart of US democracy has taken a more literal form. We are more than happy to have our equity hedges in place for now.
Unsurprisingly, US markets have taken the news of Trump’s affliction badly, and S&P 500 and NASDAQ index futures are down more than -1% ahead of the Friday session. Elsewhere equities are also under pressure, with both European and Asian indices having fallen at the open (albeit somewhat less than is expected of US peers when trading begins later today). The market declines follow a relatively benign final stretch for stocks in September, a month otherwise scarred by a broad sell-off in risk assets. By the close of Thursday trading, the S&P 500 Index was up +2.5% for the week, the pan-European Stoxx 600 Index was up +1.8%, and the MSCI EM Index had climbed +2.4% (in USD). Whether investors can hold onto these weekly gains is anyone’s guess, but there is little doubt that market volatility will continue in the medium-term at least. Even leaving the pandemic to one side for a moment, it is difficult to imagine a more complex geopolitical picture than that which confronts investors as we enter Q4. From Brexit to Belarus, international relations are in flux, while war risks are rising from the Caucasus Mountains to the Taiwan Strait. Meanwhile, America is distracted by its own torrid politics – and is now experiencing a more than metaphorical absence of leadership. Throw the worst economic crisis, perhaps ever, into the mix, and you have a cauldron of catalysts that could spark a major correction before year end.
To be sure, House Speaker Pelosi and Treasury Secretary Mnuchin could yet beat the odds and agree on a fiscal package to support the US economy in the coming weeks (as requested by the Fed). This would undoubtedly lift market sentiment and help Wall Street as much as Main Street through the winter months. Indeed, given that some US data, notably payrolls, have shown signs of improvement recently, and several vaccines are now close to approval, perhaps equities could at least recover the September losses before year-end if a suitable stimulus were agreed. But the decision by Congressional Democrats to pass a $2.2tn package this week without Republican support (which guarantees that the legislation will fail) shows that partisan priorities are driving policy in Washington. Surprise, surprise!
While on the subject of urgent deals that need to be made soon, UK and EU officials continued to thrash out the terms of Brexit this week and there were even murmurs of progress in closed-door meetings in Brussels. UK PM Boris Johnson has called for the talks to conclude by 15 October such that, should no agreement be reached, both sides have time to prepare for a ‘no deal’ Brexit on New Year’s Day. The principle areas of disagreement (i.e., EU access to UK fisheries, UK access to the EU single market for sectors where UK regulations are allowed to diverge significantly from those of the EU, and the flexibility of rules governing UK state aid) have not yet been resolved. So far, neither side will confirm that they are willing to make concessions to secure a deal. However, a disorderly and cantankerous Brexit in the middle of the coronavirus pandemic is clearly in no one’s interest. This week, the UK Parliament upped the ante by passing a controversial Internal Market Bill that over-rides certain aspects of Irish backstop in the Withdrawal Agreement that the two sides struck last year. If the provisions of that bill are enacted after a ‘no deal’ Brexit relations are likely to plummet. And the EU has now announced that it will take the UK to court over the bill if no resolution is found by the end of the month. We expect EUR and GBP to remain under pressure at least until a deal is agreed. Holding dollars is for the smart money.
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