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Markets are faced with at least three evolving narratives: the ‘Fed’ story, the ‘second wave’ story, and the ‘US election’ story but economists at UBS believe the Fed story will prevail in the medium-term to favour the US dollar. 

Key quotes

“While news headlines can make us think the second-wave and election stories are the biggest drivers for markets, it is the Fed story that will endure over the medium-term. We are positive on the outlook for both equities and credit. The naked truth is that the Federal Reserve has never been more explicit with its intentions. It intends to use its powers to help ordinary workers, fully expecting that it will also benefit owners of capital. Indeed, Fed Chair Jerome Powell may even think that efforts to loosen financial conditions will increase inequality, provided the rising tide lifts all boats.”

“The two other narratives – centered around a second wave of the virus and the US election – will create volatility as headlines feed investors’ hopes and fears about the speed and strength of the economic recovery. But ultimately we think the Fed’s efforts will continue to support capital in risk assets.” 

“We believe these evolving narratives create opportunities for investors. The Fed story should be supportive of equities and credit such as USD and Asian high yield bonds, hard-currency emerging market sovereign bonds, as well as private credit strategies. Should fears of a second-wave story prove overblown, it will support recovery plays including US mid-caps, the UK and German markets, and stocks geared toward a reopening of the economy. Finally, the US election story is likely to cause volatility leading up to the November vote as markets weigh the prospects of additional fiscal stimulus against the potential for higher taxes and increased regulation. However, the election also provides additional insurance that the Fed won’t hike rates and that both political parties are likely to support further stimulus into the election.”