Investors struggling to decide if Donald Trump's COVID-19 infection is market-moving
The US president's illness adds another layer of uncertainty on what was already an uncertain and volatile situation.
Friday 2 October 2020 18:37, UK
Donald Trump's positive test for COVID-19 is difficult to trade.
On the face of it, unexpected news like this prompts traders to go "risk-off", in the jargon - ditching riskier assets, such as some equities and currencies, in favour of safe haven assets such as the Swiss franc, Japanese yen, US Treasury bonds and gold.
That was the predictable and knee-jerk response as automated trading strategies - which would have been pre-programmed months ago for an eventuality like this - initially kicked in.
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The Australian stock market was still open when news of the president's test emerged and it accordingly sold off.
The main Australian stock index, the ASX 200, finished 1.39% lower to complete its worst week since April.
Similarly, on the foreign exchange markets, the Australian dollar and New Zealand dollar was sold in favour of the US dollar and the yen.
Asian markets similarly sold off, with the Nikkei 225 in Tokyo falling by 0.67%, while Singapore also finished lower.
Equity markets in Shanghai and Hong Kong were both closed for public holidays, while there were actually gains for stocks in India and South Korea.
In Europe, equities also opened to the downside, but most main indices, including the FTSE-100, only fell by 1% or so - hardly a dramatic sell-off.
They have clawed back some of those losses as the session has ground on.
If the sell-off was relatively unspectacular, so was the rally in safe haven assets, with the price of gold rising by less than 0.5% at its best.
Arguably the more eye-catching moves have been in government bonds, with the yield on Italian 10-year government debt (the yield on a bond falls as the price rises and vice-versa) falling to a new all-time low, while yields on other eurozone government bonds, such as those of Germany, also fell.
And these moves, arguably, were less to do with Mr Trump's COVID-19 test and more to do with the fact that it emerged this morning that inflation in the eurozone has sunk even further into negative territory and now stands at -0.3% - a development likely to ensure more buying of eurozone government bonds by the European Central Bank.
Arguably, the asset price most affected by the news has been the oil price, which fell by nearly 4% at one stage.
This reflects an expectation that Mr Trump's diagnosis is seen as tipping the race for the White House further in favour of Joe Biden, his Democrat challenger, who is widely perceived to be anti-oil.
Overall, though, investors are struggling to determine whether Mr Trump's infection is a market-moving event.
The main thing driving markets everywhere continues to be quantitative easing (QE).
The US Federal Reserve, Bank of Japan and European Central Bank are all pumping trillions of dollars' worth of liquidity into markets via their asset purchase scheme, providing a prop to both bonds and equities.
Second to that is the tussle in US Congress about the size and sweep of the next government stimulus package - the fourth - to help the world's biggest economy cope through the pandemic.
Mr Trump's diagnosis has no impact on the first of these and, arguably, little on the latter.
Democrats and Republicans in the House of Representatives were already broadly divided on party lines on the matter.
Moreover, there is also a reasonable degree of agnosticism among investors towards the election.
Mr Trump initially delighted Wall Street with big tax cuts for businesses and moves to deregulate parts of the US economy.
More recently, though, his policies have been less-investor friendly - chiefly the imposition of tariffs on Chinese and EU goods and his initiation of a trade war with China.
Weighed against that, while Mr Biden is regarded as supporting a bigger fiscal stimulus than Mr Trump, which would ordinarily be seen as good for growth, there is a lot of wariness that he would also increase taxes and regulation, particularly because the current incarnation of the Democratic Party leans further to the left than its predecessors.
Mr Biden, partly because of his age, is also seen as less capable of keeping those left-wing tendencies in check than, say, Barack Obama or Bill Clinton.
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As Mark Dowding, chief investment officer at the fund manager BlueBay Asset Management, puts it: "Ordinarily, we might expect equities to rally on a Trump win and sell off on a blue wave, based on the perception of low or high taxation.
"However, at this juncture, hopes for higher fiscal spending under a Biden administration could support sentiment, whereas concerns that a narrow Trump win may act as a catalyst for civil unrest could be problematic."
In short - this is another layer of uncertainty on what was already an uncertain and volatile situation.
Until Mr Trump's quarantine can be proved as having a decisive impact on the election one way or the other, it will not necessarily be seen as market-moving.