Global stocks are set to end the week on a downer, as Treasury Secretary Steven Mnuchin and Fed Chair Jerome Powell engage in a public disagreement over how US stimulus funds should be deployed.  Mnuchin had asked for the yet-unused US$455 billion from the Fed’s emergency pandemic lending programme to be returned and injected into the US economy; a proposal that was met with swift rejection by the Fed.

Such frosty exchanges between the US fiscal and monetary sides being exposed to the public arena only further erodes the already-fragile market sentiment, prompting investors to adopt a risk-off stance. The Dollar index remains supported above the 92 psychological level while yields on 10-year Treasuries extend the pullback below the 1% mark.

Vaccine doubts eroding investor confidence

Faced with the merciless pandemic that has triggered a late-night curfew in California and school closures in New York, markets have now come upon yet another fork in the road. Investors are awaiting signals on whether to revert to the pandemic-era playbook of sticking with lockdown beneficiaries such as tech megacaps, or press on with the rotation play which is underpinned by expectations of an incoming Covid-19 vaccine and a fresh round of US fiscal stimulus.

Yet, the euphoria surrounding the vaccine is fast dwindling, as investors are still left to decipher the duration and the extent of the vaccine’s effectiveness. Amid this void of crucial information, biotech stocks are losing some of their mojo, while pandemic-era stalwarts are returning to the fore.

US political impasse dampens market mood

Keep in mind that the Democrat’s agenda is on a knife’s edge, pending the pair of Senate runoffs in Georgia in January. It remains to be seen whether Democrats can gather enough political mass to push through its policies, including a larger stimulus package. In the meantime, the political stalemate is depriving the US economy of some much-needed stimulus, which in turn is denying riskier assets a clear mandate to push even higher.

Note that the latest weekly reading on initial US jobless claims coming in worse than expected at 742,000, which is still more than three times higher compared to pre-pandemic levels. The stubbornly high jobless claims, coupled with the underwhelming October US retail sales data which was released earlier in the week, compound concerns that the US economic recovery is at risk of stalling out.

Winter is coming

Given the uncertain timeline before we can see a world that’s vaccinated from Covid-19, or the chances of attaining herd immunity, coupled with persistent fears of a double-dip recession in major economies, global investors would indeed do well to brace for a dark winter and take care not to slip on the icy path ahead.