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US stock market vulnerable: risks to consider...



1) Rising US Covid-19 cases and the risk of a Joe Biden lockdown


While markets have been focused on Joe Biden’s election victory over incumbent US President Trump, as well as positive vaccine updates from Pfizer and BioNtech on Monday and more recently from Curevac (a Chinese vaccine maker whose vaccine can apparently be stored at fridge temperature as opposed to needing to be frozen), the US Covid-19 pandemic has been worsening.


New infections his a record high 142k yesterday, up 69% over the past 14 days, meanwhile, deaths were at 1400 yesterday, up 36% over the past 14 days. Amid a lack of leadership from the President, who is more pre-occupied by his claims over election fraud, various states have already started tightening economic restrictions. Yesterday, New York announced a new curfew and Detroit schools today closed face-to-face learning. However, it seems that in the absence of a coordinated national plan to tackle the virus (as we are seeing across Europe), the pandemic looks set to continue worsening over the winter.


President-election Joe Biden is talking about a 4-6 week lockdown when he takes office to get the virus under control. Markets, which have been so bullish lately and preoccupied with life after the pandemic, might not have fully priced in these risks yet.



2) Contested election risks rising?


Prior to the election, one of the key risks being flagged by analysts was the prospect that if Trump lost, he might not accept the result and might contest the outcome, claiming fraud. This, analysts claimed, might trigger a stock market sell off. Obviously, this has not come into fruition, with markets seemingly judging the chances of Trump’s ability to overturn the election result as to slim to really matter.


However, though Trump is not expected to be able to overturn the election result, there are some growing concerns that the transfer of power between the Trump and Biden administrations might not go as smoothly as we have seen in the past. Refinitiv data shows that options markets are pricing in a jump in volatility in January consistent with a handoff of power to a Biden Administration.


Elsewhere, the Senate election is still not over. Georgia will see two “run off” elections in January that could end up deciding who holds a majority in the Senate. If the Democrats can pull it off and get a majority, this would be huge as it would mean a multi-trillion dollar fiscal stimulus spending package is on the way in 2021. If not, 2021 fiscal stimulus will be much smaller to compromise with the Republicans.


Markets have not shown much concern regarding these two risks just yet, and this could weigh on things going forward. 

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