Downside Risks Remain Despite Desperation Rally

Written by: Craig Erlam | OANDA Europe

European stock markets are mostly lower on Tuesday, with US futures pointing to a similar open on Wall Street as the Trump relief rally quickly runs out of steam.

Days like yesterday highlight the desperation in these markets to find something positive to cling on to; anything that justifies buying in these highly uncertain times. I'm hopeful that a vaccine will become available late this year to those most in need and be widely available by the spring and this is probably much of the reason why the FOMO trade is holding firm.

But it doesn't change the fact that we're less than a month away from a once in a lifetime election, one that even in the best case scenario will be drawn out. Worst case scenario would be far, far worse. Meanwhile, Congress is working hard to find a compromise on essential fiscal stimulus that will support the economic recovery through a tough winter. Another thing that may be supporting the FOMO trade. But they're running out of time and there's still a huge gap between the numbers being discussed.

Throw into the mix the rising Covid cases around the world and even accounting for the improvements in the treatment and survival rate, this is far from a backdrop that's supportive of record markets. And that's only the US. The UK has a possible no-deal Brexit to contend with on top of it all. That's a lot of downside risk that may hurt these markets over the next month.  

Oil sees near term support from outages

Oil prices are 1% higher again on Tuesday, adding to Monday's strong gains which came following a flurry of bullish news for crude. Trump's return from hospital was generally supportive of risk appetite and gave oil a kick higher, while strikes at six Norwegian offshore oil and gas fields has hit output by around 330,000 barrels of oil evuivalent per day, or 8% of total production.

It's been an intense hurricane season already and we're now well into the greek alphabet with eight weeks still to go. Hurricane Delta is rapidly intensifying as it enters the Gulf and oil companies are already beginning offshore evacuations in the region that accounts for 17% of US crude oil production. WTI is approaching $40 again and while near-term risks seems tilted to the upside, they will pass and the prices could quickly tumble once again.

Gold still looks bearish, despite recent recovery

Gold is pretty flat today but holding above $1,900 which bulls will be encouraged by. While I'm a longer term bull, I'm far from enthused. The rally is really struggling to gather momentum and while a close above $1,900 was a promising sign, I'm not yet sold. I think some more near-term downside may be on the cards and the reluctance we're seeing in the recovery rally isn't changing my view on this. We've seen some paring back but I feel we're poised for some risk aversion in the coming weeks and right now, that doesn't favour gold.

Related: Trump Needs To Deliver More Stimulus for Votes