Underlying Market Risks

U.S. PRESIDENTIAL TRANSITION

With 3 days to go before the inauguration of Joe Biden as the 46th President of the United States, The House of Representatives impeached Donald Trump for a 2nd time, formally charging him with inciting an insurrection, just a week after protestors stormed Capitol Hill. Uncertainty regarding Trump’s trial date in Senate combined with a cautious inauguration, amplifies the possibility for further unrest. The impeachment trial could be delayed until after Joe Biden’s first 100 days in office, as it is likely to impact the passing of legislation.

 

President-Elect Biden will control the House, Senate and the White House for the first time in 12-years where a political party will have complete control. Market participants may hold-off on a rebalancing of risk exposure until after the 20th of January.

Markets Impacted: USD/JPY, GBP/USD, EUR/USD, AUD/USD, USD/CAD, USD/CHF, S&P 500, DJIA, U.S. BONDS (10-year)

Risk Type: Continuous

Approximate Likelihood: 7/10

Approximate Risk to Market: 50 Pips

ON-GOING GLOBAL COVID-19 CONDITIONS:

A growth of new COVID-19 cases has seen a serious re-imposition of aggressive lockdown measures in an increasing number of regions and on a national scale, which has stalled the recovery of the major G20 economies. New outbreaks of COVID-19 in the north and northeast region of China as well as South America and Portugal have jolted some investors, raising early questions on a synchronized global recovery, underpinning how the focus has shifted towards the long-tail suppression of economic growth, rather than national and intranational lockdown measures.

 

COVID-19 has seen a serious major resurgence within financial nations, with market willingness to remain cautiously steady until significant vaccine rollout progress has been made.

Markets Impacted: FTSE 100, DAX, GBP/USD, EUR/USD, EUR/GBP, AUD/USD, Crude Oil

Risk Type: Continuous

Approximate Likelihood: 10/10

Approximate Risk to Market: 100 Pips

GLOBAL DEMAND FOR OIL:

Demand is primarily driven by the continued economic slowdown within the major oil consuming nations, caused by ongoing lockdown measures in response to COVID-19. Analysts still expect global oil demand to continue to be curtailed.

 

As we move into 2021, demand is estimated to reduce by 900,000 barrels per day and the global recovery is slowing more than initially projected. With Saudi Arabia suggesting further cuts to production, market participants are expecting near-term underlying positive sentiment. Saudi Arabia is likely to curb 1 million barrels a day of supply in February and March. However, December 2020 output rose by 280,000 bpd in Libya, UAE and Iraq, potentially dampening any substantial increase in price.

 

U.S. total oil supply will also rise by 370,000 barrels per day (bpd) in 2021 to 17.99 million bpd, the Organization of the Petroleum Exporting Countries said in a monthly report, up 71,000 bpd from the previous forecast. With rising cases of COVID-19, markets may witness further shocks, reducing demand in the short to medium term. The rolling out of vaccines to combat COVID-19, throughout major economies, could see global demand for oil increasing.

Markets Impacted: U.S. Crude Oil, Brent Oil, USD/CAD, USD/NOK

Risk Type: Continuous

Approximate Likelihood: 5/10

Approximate Risk to Market: 100 Pips

ONGOING MONETARY & FISCAL RESPONSE:

With the severity of the ‘third wave’ on a global scale, current data suggests any economic recovery within the G8 nations achieved to date, has diminished, with market participants continuing to take a risk-off approach as a result of buyer behaviour and increasing lockdown restrictions. Given the position of most major Central Banks and their willingness to consider negative interest rates, it is becoming more likely that there may be no alternative to further fiscal stimulus.

 

In the US, President-Elect Biden, has unveiled a $1.9T American Rescue Plan which will include familiar stimulus measures with the goal of sustaining families and firms until vaccines are widely distributed. Even though this could be seen as a ‘risk-on’ development, the absence of reaction so far in US equities, underscores the overall concern from investors, of further fiscal stimulus, not being available until February 2021.

 

In the UK, market chatter has exposed some risk of negative interest rates by Winter 2021, based on another national lockdown and increase in the government’s spending plans. However, the Bank of England’s MPC (Monetary Policy Committee) remains divided on the viability of negative rates on the world’s leading financial centre.

Markets Impacted: USD/JPY, GBP/USD, EUR/USD, S&P 500, DJIA

Risk Type: Continuous & Spike

Approximate Likelihood: 10/10 & 3/10

Approximate Risk to Market: 75 Pips & 150 Pips 

GLOBAL TRADE AND DIPLOMATIC ENVIRONMENT:

UK and the US continue to be locked in ongoing diplomatic discussions with China, and we may see volatility within currencies and indices, should this issue continue to escalate politically.

 

The UK and US saw their negotiating hand weakened last month when the EU signed a trade agreement with China. Tensions between the nations may re-ignite after index providers S&P, Dow Jones, MSCI and FTSE Russell delisted Chinese technology companies. China’s foreign ministry said it firmly opposes what it called the United States’ abuse of its power to oppress Chinese companies.

 

Pressures between Australia and China continue to remain elevated with regard to Chinese discriminations in relation to Australian coal, adding to the overall fragility between major economies.

Markets Impacted: FX risk proxies (USD, JPY, AUD, NZD)

Risk Type: Spike

Approximate Likelihood: 3/10

Approximate Risk to Market: 30 Pips

UK/EU FREE TRADE AGREEMENT:

Whilst the UK/EU free trade agreement has been signed, no decisions have been made towards financial services, leaving the UK/EU financial services in limbo with no clear understanding of how passporting and regulatory equivalence will function going forward.

 

With the UK out of the EEA (European Economic Area), there may be limitations and costs associated with trading Clearing, Shares, Futures and Options. Analysts are unable to confirm what this will look like and in the near-term we may see negative impacts in volumes and ease of trade.

Markets Impacted: FX risk proxies (USD, JPY, AUD, NZD)

Risk Type: Continuous 

Approximate Likelihood: 10/10

Approximate Risk to Market: 10-20 Pips