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Investors are warning against higher volatility and a potentially deeper selloff in risk assets after the news of President Donald Trump and the First Lady testing positive for Covid-19 shattered the calm in global markets Friday.
U.S. equity futures slumped as much as 2% and Asian stocks also declined following theannouncement. The dollar and the yen climbed as the news stoked risk aversion. VIX October futures jumped as much as 12%.
“Markets hate uncertainty and this ticks all those boxes,” said Jeffrey Halley, senior market analyst for Asia Pacific with Oanda Corp. “Not because of the President alone, but because this potentially means it has spread to the upper-level echelons of the government in the U.S.”
This is what other investors are saying:
“This will induce nervousness in the markets and we could see a 10% correction in U.S. equities that will likely drag down Asian equities for the balance of the year,” said Gary Dugan, chief executive officer at Global CIO Office.
“Longer-term, people will see a sharper contrast between Asian and U.S. equities. Asia has political stability and strong technology companies in the north. For people looking to allocate globally, this just makes Asia more attractive.”
Rush for Havens
“There will be another selloff,” Nirgunan Tiruchelvam, analyst at Tellimer, said by phone. “The potential selloff can last for few days. Tech will most vulnerable because there valuations are stretched.”
“It might also impact Trump’s chance of getting elected. People are going to go for gold and other safe assets.”
Investors will move into haven positioning, according to Halley of Oanda. Expects equities and energy to fall, the U.S. dollar to rally, especially against procyclicals such as the euro and the Aussie. Says gold will also rally.
Hedge Against S&P
“Investors should hedge themselves against S&P,” said Justin Tang, the head of Asian research at United First Partners in Singapore. “Most people may still be having their hedges on given what happened in March. A lot depends on what happens in next seven days.”
“If Trump goes to ICU it is going to be a big problem but if he is asymptomatic that volatility may get contained.”
“This will further lead to dollar weakness as it comes on top of the likely prospect that U.S. stimulus package won’t get approval until after the election,” said Jun Kato, chief market analyst at Shinkin Asset Management. “This may also pressure the Fed to deliver a more dovish tone that would cap U.S. yields and weigh on the dollar.”
The yen may climb to 104 per dollar, Kato said.
Risk aversion “will boost the dollar’s haven appeal, keeping emerging currencies on the back foot,” according to Mingze Wu, a currency trader at StoneX Group.
“As this creates uncertainty with the U.S. Presidential election in focus for the market, credit spreads may widen initially and market likely remains volatile in the weeks ahead,” said Ek Pon Tay, portfolio manager for emerging market fixed income at BNP Paribas Asset Management.
“As and when this event risk recedes and/or valuations correct further, I’m likely to have a more positive stance on the market and to add risk.”
President Trump will likely take more steps against China to maintain support from his voters following news he’s been tested positive for Covid-19, and could lead to a series of after-shocks in markets, said Sebastien Galy, senior macro strategist at Nordea Investment Funds.
— With assistance by Masaki Kondo, Joanna Ossinger, Chikako Mogi, Chester Yung, Lilian Karunungan, Tomoko Yamazaki, Finbarr Flynn, and Ameya Karve
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