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A nerve-wracking end to 2020 draws near

Han Tan, Market Analyst at FXTM, comments on the state of international financial markets as the end of 2020 draws near.

Markets await fate of US fiscal stimulus, Brexit trade deal Enough reasons to remain risk-on Moderna vaccine’s FDA approval could spur equities higher

Just two weeks are left before the curtains are drawn on 2020, and investors are still being made to wait on the ultimate fate of a couple of market-defining events. US politicians continue to jostle over the fate of the next fiscal stimulus package, while the EU and the UK have yet to reconcile their differences surrounding a Brexit trade deal.

There is a common feature of proceedings on both sides of the Atlantic is that time is running out. Although major uncertainties refuse to vanish, markets are already making assumptions.

Fiscal stimulus deal to boost US stocks higher

US stocks climbed to record heights once more on Thursday on the hopes that Congress can seal a deal by the weekend. However, recent commentary out of Congressional leaders has doused such expectations, who are even hinting at a brief federal government shutdown. US stock futures are edging up at the time of writing.

Investors are willing to believe that more fiscal stimulus will arrive; it’s just a matter of “when”, not “if”.

The current state of the US economy clearly warrants more financial support. Thursday’s initial jobless claims were worse than expected, while US consumers evidently reigned in their spending in November. The pandemic is still claiming lives at an alarming rate and the total number of US Covid-19 cases has now exceeded 17 million.

The fresh injection of government funds into the economy would serve as justification for the already-lofty valuations in US equities. The longer risk assets are made to wait, the bigger the concern of a pullback as fiscal stimulus ‘fatigue’ sets in.

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Plenty of support for risk sentiment

Still, risk assets should have enough reasons to patiently wait for a positive outcome, despite having endured multiple false dawns after months of negotiations that have yielded naught. The expected FDA approval for Moderna’s vaccine, which could happen today is set to appease risk sentiment while waiting for the political impasse to be resolved. Also, stock markets can continue taking heart by the Fed’s latest pledge to continue supporting the US economy and financial conditions, which ultimately translates into a conducive environment for further equity gains.

Brexit’s umpteenth ‘last-chance saloon’

Brexit trade talks have been issued a fresh deadline by the European Parliament who have said that an agreement must be reached by this Sunday in order to allow enough time for ratification. Even allowing for broad based Dollar weakness, the Pound is still willing to cling on to hopes that a deal can be struck, going by the fact that GBPUSD continues to trade around its highest levels in over two years.

Despite there being only two weeks left before the Brexit transition period ends, both sides continue to harp on about the “big differences” between the UK and EU’s respective stances. Sterling’s performance of late indicates that more of the trade deal optimism has been baked in compared to the risk of a hard Brexit. This finale could bring either sweet confirmation or a rude shock for markets, while leaving investors on tenterhooks in the interim as we see out this tumultuous year.

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