There may be trouble ahead…
Raf Choudhury
State Street Global Advisors
But while there’s moonlight and music, and love and romance, let’s face the music and dance… That’s kind of how it feels at the moment as we head into the later part of the year. COVID-19 has been the main concern this year and I’ve already covered the impact a second wave could have in my previous notes. From a market perspective, it really has been a case of looking at the risks square in the face and navigating them as best we can.
However as we traverse the second half of the year there are new forms of risk ahead. Coronavirus and the impact of subsequent waves is still front of mind, but elections are nearing and creating increased uncertainty. The US elections at the start of November provide the likeliest source of increased volatility. The worst case scenario from a markets perspective would be for a contested outcome, likely if the votes show a narrow loss for Trump. He has already made comments about the election being rigged and a close call would only spur him on. That could leave the US in a temporary state of limbo. At the moment the market is expecting a democratic win. However, odds of a democratic sweep have retreated slightly over the past month and we also expect polls to tighten further. Campaigning will soon accelerate as we enter debate season and the policies of both parties will be more closely scrutinised.
If the last US election taught us anything, it’s that anything can happen.
However the US election is not the only risk we face. At the end of August, Prime Minister Abe of Japan surprised markets with his resignation announcement due to ongoing health reasons. There was some conjecture that he was ill as he had only just returned to work after a three-day summer break that included a hospital visit but his resignation was unexpected. With his announcement the Nikkei 225 Index sold off by over 2% before recovering a third of those losses. Again the market is pricing in uncertainty. This is uncertainty surrounding who the next Prime Minister will be as well as around the long term future of “Abe-nomics”.
And while the US and Japan face election uncertainty, Europe is still dealing with the fallout from Brexit. The UK and EU have until December 31, 2020 to negotiate economic and trade deals and despite the onslaught of coronavirus, extensions beyond this date have been ruled out. Tensions between the UK and Europe seem to be increasing as they try and negotiate a deal including customs rules which have been the latest topic to create angst. Talks now seem in jeopardy with the EU preparing itself in the event of a no-deal scenario to trade with the UK on World Trade Organisation terms.
As can be seen, there are plenty of events all around the world to contend with. Plenty of sources of uncertainty for markets to deal with. And plenty of risks we face and have to navigate.
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