How are things shaping up as we go into Q4?
Words fail to describe the string of shocking events so far in 2020 which have undoubtedly left deep marks in the books of history.
From a global pandemic to unprecedented central bank support, abysmal economic data and the widening disconnect between financial markets and real economy among many other themes injected markets with explosive levels of volatility. It is safe to say that the past few months have been quite surreal as investors juggled with a growing list of key themes swinging the risk pendulum between two extremes. As we enter the final quarter of 2020, global investors still face major risk events that could spark significant movements across equity, currency and commodity markets.
Only two days into Q4, investors received market shaking news that sparked fresh waves of risk aversion across the board. In a shocking development, US President Donald Trump and his wife tested positive for coronavirus just a month before the presidential election. There was already a sense of unease from the first presidential debate that yielded no winners and raised fears over a potentially delayed presidential election outcome. This event adds another element of uncertainty into the equation and questions the likelihood of the next presidential debate in two weeks taking place.
In the United Kingdom, Brexit will most likely remain a major risk for the rest of 2020. After nine round of trade talks, it remains unclear whether the UK and European Union will be able to secure a deal before the October 15th deadline. In the latest twists and turns to this long saga, the EU has launched legal proceedings against the UK over its plans to override sections of its divorce deal. Given how the UK is currently entangled in a fierce battle against COVID-19, a messy exit from the EU is the last thing the economy needs. The British Pound weakened against almost every single G10 currency in Q3 and may extend losses if a hard Brexit becomes reality.
As global coronavirus cases rise and fears intensify over another round of lockdowns across the world, equity bulls could face headwinds in Q4. Over the past few months, stock markets have derived strength from unprecedented central bank action and handsome fiscal packages unleashed by governments across the world. Frequent bursts of optimism over a coronavirus vaccine supported upside gains despite economic fundamentals painting a different picture. If global macroeconomic conditions fail to improve during the final quarter of this year, equity bulls may have little justification to keep stock markets at current levels with bears re-entering the scene.
Just taking stock of the key themes and potential risks set to influence markets over the next three months, it may be wise to fasten your seatbelts and prepared for dizzying levels of volatility.
This article was written by Lukman Otunuga, Senior Research Analyst at FXTM
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