US stocks were on course to record their steepest monthly decline since March’s market meltdown, with the presidential debate failing to assuage investor concerns about the looming election.

Wall Street futures fluctuated after the tussle on Tuesday evening between Donald Trump and Democratic challenger Joe Biden. S&P 500 futures were off 0.5 per cent, but had been down more than 1 per cent during the European morning.

Deepening angst ahead of the election in the world’s largest economy also weighed on European shares, while better than expected Chinese economic data did little to lift the cautious mood.

US stocks rallied from April to August as the Federal Reserve conducted a massive monetary stimulus. However, sentiment has since darkened, leaving the S&P 500 down about 5 per cent for September.

Line chart of S&P 500 showing US stocks pull back from high hit in early September

When asked repeatedly whether he would commit to respecting the results of November’s election, Mr Trump instead reiterated his assertions of widespread voter fraud.

“Trump clearly did not assuage concerns about a contested election, should he lose,” said Supriya Menon, senior strategist at Pictet Asset Management.

“He also appeared to do little to win over independent voters,” Ms Menon added, raising the prospect of a Democratic victory that could mean lower earnings for companies if Mr Biden raised taxes, as well as “issues over governability” if Mr Trump did not immediately concede the presidency.

The prospect of a disputed election has also increased speculation that US stock markets will be volatile after the vote. Futures contracts pinned to the Vix, the index known as the markets’ “fear gauge”, suggest that would hit readings of 30 or more between October and December. When markets are calm, the Vix usually trades at 20 or below.

Line chart of Contract levels by maturity (points) showing 'Kink' in Vix futures curve illustrates election angst

By early afternoon in London, the Europe-wide Stoxx 600 was down 0.2 per cent. Frankfurt’s Xetra Dax and France’s CAC 40 both fell 0.5 per cent.

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The losses came despite signs that China — whose imports and overseas consumption support activity across the globe — was recovering strongly from the coronavirus pandemic.

China’s official purchasing managers’ index for the manufacturing sector, which tracks how companies are trading and how confident managers feel, rose to a reading of 51.5 in September from 51 in August. This was a better result than economists polled by Reuters expected for the index, where any reading over 50 shows expansion. New export orders rose for the first time since the Covid-19 pandemic began.

But the data failed to lift Chinese markets and the oil price. China’s CSI 300 index of Shanghai and Shenzhen-listed stocks gave up early gains to fall 0.1 per cent.

Brent crude dropped 1.6 per cent to $40.81 a barrel, potentially hit by a strengthening dollar, which makes oil imports more expensive for non-US buyers.

The index tracking the dollar against trading partners’ currencies hovered around a two-month high on Wednesday, reflecting how investors view the US currency as a shelter from economic shocks.

Georgina Taylor, strategist at Invesco, pointed out that the end of a quarter, a time when fund managers would often reposition their portfolios, could be adding to selling pressure for stocks.

The election debate, rising coronavirus cases worldwide and the final round of Brexit talks were all “increasing political and economic uncertainty, and markets do not like uncertainty”, Ms Taylor said. This, she added, meant fund managers could be selling assets to make more cash available for clients’ redemptions.

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Via Financial Times