U.S. Stimulus Prospects Buoy Strategists Wary of Trump Prognosis

(Bloomberg) -- Markets steadied Monday on easing fears over President Donald Trump's health and increased optimism over fresh U.S. fiscal stimulus, though his prognosis after contracting Covid-19 remains a risk, according to strategists.

Trump's diagnosis boosts the likelihood of Congress and the White House reaching a deal on pandemic relief before the election, they said. Shifting odds on a Democratic victory could impact the dollar, while cyclical stocks would benefit from any stimulus deal, they added.

Doctors on Sunday insisted Trump is doing well and could be discharged as soon as Monday, though contradictory accounts about his illness left lingering confusion about the president's progress.

Here are some strategist views on the current state of play:

Hospital Stay

“Risk sentiment could improve further as Trump's condition appears to be better than originally believed,” said Masakazu Satou, a currency adviser at retail FX brokerage Gaitame Online in Tokyo. “But now we need to see whether Trump will actually be discharged from the hospital later on Monday. If not, that should invite another major bout of volatility to prompt purchases of haven assets.”

Dollar Shorts

Goldman Sachs Group Inc. strategists including Zach Pandl said in a note Sunday that they're unsure how the latest developments will affect polling or the eventual result.

But they added that changes that raise the odds of a Democratic sweep under Joe Biden should accelerate dollar weakness, while events favoring Trump's reelection would bolster the currency. The strategists said they're “holding off on recommending new dollar shorts for now as we await more information on how the president's health situation will affect the race.”

Democratic Sweep

“Lack of a significant safe-haven bid for the dollar so far is telling,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. The recent performance of the U.S. Dollar Index “suggests that the FX market is pricing in greater odds of a Democratic sweep which many (including us) think would be dollar-negative.”

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Asian Equities

Weekend reports suggest “the likelihood of a new stimulus package may be improving as both parties see the urgency” of responding to the impact of Covid-19, JPMorgan Chase & Co. strategists led by Mixo Das wrote in a note Sunday. Overall, the key implication for Asian equities is that “market pricing of election-related risk may be overdone” due to a “very low probability of tail scenarios.”

Value, Cyclicals

“Odds of a roughly $1.7 trillion fiscal package plus a Democratic election sweep have increased and provide support for growth expectations,” said Evercore ISI strategist Dennis DeBusschere in a note Sunday. Such a backdrop would be a “significant” support for value and cyclical stocks short term, he added.

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Fewer Fears

Monday morning began with a more positive risk tone, said Ray Attrill, head of foreign-exchange strategy at National Australia Bank Ltd. in Sydney, with the possibility of Trump's release from hospital countering fears the U.S. election might not take place on schedule. Increased confidence that U.S. lawmakers may agree on fresh fiscal stimulus is helping the mood, he said.

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