Risk Aversion is Back!

Written by: Edward Moya | OANDA

US stocks are tumbling as the economic outlook for the rest of the year looks bleak due to second wave virus fears and permanent labor market damage.  Wall Street appears convinced a return of restrictive measures will yield further economic damage that will threaten the labor market recovery.  Traders are not holding their breath for a virus stimulus bill this side of the election so risky assets will have a hard time rallying.  A significant selloff however seems unlikely as Wall Street prices in a Biden presidency and massive infrastructure spending.  

Jobless Claims

Weekly initial jobless claims continue to paint a very ugly picture of the US economy.  This week’s reading posted a surprise increase to 898,000, much higher than the consensus estimate of 825,000 and the upwardly revised prior reading of 845,000.  The number of Americans filing new claims remains 4x the pre-pandemic level and is ringing alarms that permanent damage to the labor market is happening.  With California data still being locked, it is unsure how much worse the numbers could be.  The pressure on Washington DC is high, but disturbingly not at a breaking point.  Partisan politics is inflicting unnecessary pain and suffering for millions of Americans.  What might be needed for Congress to break the impasse is for another major industry to announce massive job losses. 


Fiscal stimulus talks should at the very least yield a temporary solution in payroll support and PPE program. Treasury Secretary Mnuchin has conceded with the Democrats’ testing demands and is now winning public support in putting to use the $300 billion left in the CARES Act and continuing negotiations for a broader deal.  Mnuchin noted that House Speaker Pelosi is holding out for an all or nothing deal, a rare criticism that indicates his growing frustration.  Negotiations are now over two months long and it seems Democrats do not want to give President Trump a win before election day. 

Manufacturing Surveys

A rare simultaneous release of Empire State and Philly Fed showed the manufacturing rebound continues but momentum is fading.  The Empire manufacturing report showed strong increases across the board except for future business conditions, which showed optimism was less positive than last month.    The Philly Fed posted a strong improvement, driven by a massive upswing in new orders. 

If the manufacturing rebound remains steady, that should be a good sign for future hiring.  Optimism for the need to add new employees might be limited however as investors remain uncertain as to how bad the next wave of the coronavirus will be over the colder months. 


Crude prices don’t stand a chance of rising as COVID-19 intensity in Europe and the US accelerates.  The coronavirus surge is forcing Europe to reinstate pandemic restrictions to curb the virus spread and that is driving the dollar higher and crippling short-term crude demand forecasts. 

OPEC + is expecting the oil market recovery to take a long time, in fact it seems every time they have a meeting it seems they need to downgrade their outlook.  While no one doubts the upcoming coronavirus lockdowns won’t be as stringent as they were earlier in the year, anemic demand will force them to delay any easing of oil production cuts. 

With demand expected to improve by several million-bpd next year, WTI crude prices seem destined to be much higher in 2021.  Too many short-term headwinds (virus spread/lack of stimulus) will keep oil prices low for the next couple of months. 


Gold prices are modestly lower following a much stronger dollar that stemmed from a significant rise in COVID-19 cases across Europe.  The dollar gets to wear its crown for a little while longer, but that should not be confused with the beginning of a new trend.  Right now, gold is strictly following the inverse relationship with the dollar, but that will not always be the case.  Gold’s next major bullish catalysts will stem from fresh stimulus across all the major central banks.  The outlook is clearly deteriorating across most of Europe, America, and some pockets in Asia.  The G-10 central banks are about to resume rate cuts and increase their asset purchase programs. 

Gold is hovering around the $1,900 level and seems poised to consolidate until the US presidential election passes.  Fiscal stimulus before November 3rd seems less likely and if the election yields a blue wave, Biden’s infrastructure spending plan will be very negative for the US dollar and in turn positive for gold.   Gold’s outlook for the next six months is still for prices to recapture the $2000 level and possibly make a run back towards uncharted territory.  

Related: Stocks Drop on Bank Earnings and Stimulus Stalemate