Risk off tone a week before US elections

Asian stocks are falling in line with Monday’s selloff in US equities, after the S&P 500 posted a 1.86 percent drop, its biggest one-day decline in over a month. S&P 500 Minis are still smarting from the market’s decision to de-risk as pessimism creeps in over a pre-elections US fiscal stimulus agreement.

Even though China reported a 10.1 percent increase in its September industrial profits, the fourth consecutive month of double-digit on-year gains, leading the world once again in its journey into the post-pandemic era, Asian benchmark indices are still being gripped by the broader risk-off sentiment. The risk aversion nudged Gold higher, keeping it above the psychologically-important $1900 level though still within the tight range it has adhered to of late.

Market’s fears rising

Markets are getting choppier with just a week to go before the US presidential elections. The selloff at the onset of the trading week suggests that investors are facing up to the US political risks that lie just around the bend.

The VIX index, which is widely considered to be Wall Street’s fear gauge, has crossed above the psychologically-important 30 level once more. And the VIX futures contract, which extends into mid-November, rose by 8.86 percent on Monday, indicating expectations for heightened levels of volatility over the coming weeks.

Growing list of concerns

Market participants have to also keep a close watch over Covid-19’s resurgence in major economies, with US infections hitting new records while France reported its biggest spike in hospitalizations since April. The pandemic threatens to wreck the still fledgling recovery in the global economy. Without the veneer of an imminent fiscal support for the US economy, risk assets would likely have a hard time justifying any substantial climbs over the coming days, especially considering the looming political uncertainties.

With volatility comes potential opportunities

Investors who had initially seemed complacent about the above-mentioned downside risks may have to pay the price for their complacency, and brace for potentially more market angst over the coming days. The expected record-high US Q3 GDP due Thursday, with markets forecasting a print of 32 percent, may not be enough to dissuade the bears over the immediate term. Even positive surprises in the ongoing US earnings season may only evoke a fleeting response, with investors likely to focus on the longer-term implications of the US elections and the pandemic.

Still, a shock outcome after November 3rd may present outsized opportunities across broad asset classes, provided investors still have the wherewithal to take advantage of them. However, with market uncertainties running high, perhaps the bias for risk aversion will remain intact over the rest of this week.