Boom days were back for the markets today – for one session at least – with the FTSE 100 set to leap, following big surges on Election Day in the US.
The Donald Trump – Joe Biden election battle has been marked with volatility on the financial markets but largely because of the newsflow around Covid-19 and Washington’s failed efforts to agree a fiscal stimulus for businesses and workers affected by the pandemic.
Does it mean markets are suddenly super-confident that a Biden victory won’t be so bad after all (he is consistently ahead in the polls)?
Far from it.
Says Jasper Lawler, analyst at London Capital Group, it merely follows days of selling the markets down: “We don’t read this as a ”confident in stocks” 400 points but more a “too uncertain to keep selling” 400 points.”
He points out that fears abound of a contested result, with no clear winner and a long-drawn out battle through the courts led by Trump that will cause market mayhem.
The sight of retailers boarding up their shop windows in anticipation of violence when the result is announced was never going to inspire confidence.
The Vix index, known as the “fear gauge” measuring volatility, has been rising, countering the narrative that a Biden victory is priced into share prices.
Traders today said it was likely that investors were using Vix as a hedge just in case the pollsters are wrong again about Trump.
The FTSE 100 was set to leap 55 points to 5709 on the opening, with the Dax in Germany up 110 points to 11898, according to LCG prices.
The Dow was set for another big day, up 182 at 27,107.
Much of yesterday’s gains stemmed from a strong oil price, for which investors in BP, Shell and the rest should thank Russia.
Moscow yesterday was talking up a further three month crimp on production levels to help align supply and demand through the new European Covid lockdowns.
Expect more reactions in oil stocks today as Aramco releases earnings.
Yesterday was groundhog day for traders, as they dusted off the Covid playbook from spring, buying shares in Sainsbury, Morrisons, Tesco and Kingfisher in the hope of a lockdown sales boom and selling transport and leisure stocks.
Expect some reversals today as investors trim the more extreme of those positions.
Investors’ attentions are starting to move towards Thursday’s Bank of England policy meeting where economists are predicting a £100 billion stimulus round in the form of bond buying.
The theory behind the policy is that if the Bank buys bonds, it keeps the price of debt down, offsetting some of the impact of Covid-19 on businesses and countries.
However, experts are increasingly becoming concerned that the policy is becoming less effective, or that the Bank will soon be running out of bonds to buy.
That concern adds fuel to the argument that it may soon move to cutting interest rates to below zero in the hope of boosting the economy.
According to the FT, the Bank currently owns 44% of outstanding government bonds – double the proportion of Treasuries owned by the US Federal Reserve.
Reasons to be fearful on this day of likely positivity.