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Assessing the risk scenarios: Selloff. Rebound. Now what?

Esty Dwek
Esty Dwek7/3/2020 07:00 AM GMT+08  • 5 min read
Assessing the risk scenarios: Selloff. Rebound. Now what?
One of the biggest fears in the markets now is a second Covid-19 wave. A second confinement period to halt another outbreak is of particular concern, as it would halt economic activity again and destroy the nascent recovery.
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(July 3): One of the biggest fears in the markets now is a second Covid-19 wave. A second confinement period to halt another outbreak is of particular concern, as it would halt economic activity again and destroy the nascent recovery. But we believe this is unlikely — at least for the time being. In the meantime, geopolitical risks have also crept back to the fore, starting with a rise in US-China tensions sparked by, amongst other things, a blame game over the virus outbreak and China’s plan to impose a national security law in Hong Kong.

These tensions are likely to simmer in the background at least until the US election, particularly with Democratic presidential nominee Joe Biden trying to “out-hawk” US President Donald Trump. However, we believe that we will continue to see more bark than bite. The US economy is fragile and adding tariffs or jeopardising the rally does not make much sense ahead of November. Sounding tough on China might get votes, but acting tough is a much riskier position. As we move closer to November, US elections will take over the headlines and investors will need to assess which candidate will prove more market friendly.

In our view, some higher volatility is to be expected in the run up to the elections, especially as polls have proven rather unreliable recently. Still, that should not lead to a marked sell-off. Looming in the background, the post-Brexit trade relations between Europe and the UK still needs sorting. With the deadline to extend the transition period beyond Dec 31 unlikely, the risk of a “hard Brexit” is likely to persist. We do not expect a full trade deal by the end of the year, but enough agreements on strategic areas to allow for post Brexit life to start and still negotiate a broader agreement remains a possibility.

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