There were hints of a softer risk tilt going into European morning trade today, but it has turned into a bout of heavy selling over the past two hours as we see major indices in Europe slump by nearly 3% alongside a selloff in US futures as well.
It is pretty much the traditional risk-off play with flows moving into bonds, as we see 10-year Treasury yields fall by 3 bps to 0.695% to a two-week low and 10-year bund yields falling by more than 5 bps to -0.627% – its biggest drop in more than a month.
A couple of factors that market participants are pointing to are:
- US stimulus talks encountering another setback
- Coronavirus situation worsening in Europe, UK and some other parts of the world
- Recent news of vaccine and treatment trials stalling
- US election uncertainty still looming
There’s no exact thing to really pinpoint to the drop today in my view but it perhaps is a confluence of those factors, leading to some combination of profit-taking activity.
US stimulus talks going nowhere isn’t great but it will be naive to say that it wasn’t what the market was expecting considering the leverage the Democrats have going into the election, based on the latest odds and opinion polls that is.
As stimulus talks aren’t going to reach a deal before the election, a lot of the short-term focus after will be how will the election result shape up to allow for a smooth passage for stimulus to be approved in the immediate aftermath.
In short, election focus will become synonymous to stimulus focus as that is what the market really wants more clarity about at the moment.
To that end, odds of a ‘blue sweep’ happening will be crucial to market expectations in the coming weeks as we approach the final stretch before the 3 November vote.
The pace at which risk assets have dropped today is a bit concerning but if this is mostly about stimulus setback, then this may yet be a hiccup along the way.
But if there is a bigger shift in focus in the market taking place, especially if it is to focus on virus numbers again, then there might be deeper things to worry about.