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US stocks were on course to seal their worst month since March with deepening worries about the election weighing on investor sentiment.

Solid gains in early trade on Wednesday were not enough to offset the declines recorded since the benchmark S&P 500 index notched a record high on September 2. The index has fallen about 4 per cent since the end of last month, halting a strong rally from the virus-induced lows in March.

Markets had been bolstered in the late spring and summer by stimulus measures from the Federal Reserve and federal government, combined with a weakening dollar. However, sentiment has soured in recent weeks and investors remain on guard for markets to stay choppy until after the November presidential election.

In a chaotic first debate between Donald Trump and challenger Joe Biden on Tuesday evening, the US president, when asked repeatedly whether he would commit to respecting the results of November’s election, 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.

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

The prospect of a disputed election has 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 it 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

The S&P 500 rose 0.8 per cent on Wednesday with the more tech-heavy Nasdaq Composite rising by about the same margin. By afternoon in London, the Europe-wide Stoxx 600 was down 0.2 per cent. Frankfurt’s Xetra Dax and France’s CAC 40 traded flat.

Oil prices under pressure

Brent crude, a victim of economic uncertainty caused by coronavirus and the strengthening dollar, was on track for a 10 per cent loss for September, falling 0.7 per cent on Wednesday to $40.73 a barrel. The international oil benchmark has not recorded a monthly fall since March.

Brent, which fell below $20 a barrel in April before recovering strongly until late August, tends to weaken in price as the dollar rises because a firmer US currency raises costs of oil imports for international buyers, curbing demand.

The index tracking the dollar against trading partners’ currencies hovered around a two-month high on Wednesday, reflecting how investors viewed the US currency as a shelter from economic shocks. The dollar index has gained almost 2 per cent in September in its best month for the past 14 months.

Georgina Taylor, strategist at Invesco, pointed out that the end of a quarter, a time when fund managers would often review their holdings and hedge currency exposures, could cause unexpected moves in financial assets throughout Wednesday.

Professional investors could take profits on US markets to make more cash available for clients’ redemptions, Ms Taylor said, explaining “you often see managers taking a bit of risk off the table for those trades that have done well”.

Exchange traded funds and other passive investment vehicles would be rebalancing holdings automatically, Ms Taylor added.

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