Post date: 19/10/2020 13:22
Equities worldwide sold-off alongside credit, while investors flocked back to the safe, havens, primarily the dollar, the Japanese yen and the swiss franc.
These moves were, however, modest in size and did not significantly change the trading patterns of the past few weeks. The euro is back in the middle of the trading range that it has held since august against the US dollar. The biggest losers were the European currencies, down on the fears that those countries are being hit particularly hard by the second wave of the COVID pandemic.
Markets are increasingly focussed on the US election in the first week of November. The consensus view seems to be that a democratic sweep (taking the presidency and the senate) would be a positive for risk assets and negative for the US dollar. Friday’s release of the Eurozone flash PMI indicators of business activity for October is the main data event of the week. The recent proliferation of local lockdowns introduces some downside risks here, and a serious disappointment could bring into focus further ECB easing measures.
As we expected, Brexit negotiations started last week but Boris Johnson backed away from his threat to walk away, although he did warn Britain to prepare for the possibility of a ‘no deal’ Brexit. Sterling moved largely in line with the euro, so markets clearly still expect some kind of modest deal to be reached, as we do. Both sides appear open to additional discussions, despite Johnson’s hard-line stance, with talks expected to resume within the next few days.
Not a lot of marking moving data will be released this week, so expect the focus to remain on the UK COVID numbers and the possibility of a new lockdown, which could potentially hit the pound hard. A number of areas are reportedly on the brink of moving into the highest ‘tier 3’ lockdown bracket in the coming days, including Sheffield and Leeds
The deteriorating COVID numbers in most of the Eurozone and the reimposition of local lockdowns hurt euro sentiment last week. New daily cases in the countries of all four of the bloc’s largest economies, Germany, France, Italy and Spain, jumped to record highs last week, with the majority of the euro area reintroducing tighter restriction measures.
The PMI numbers to be published Friday take on additional importance. They will be the first measure of the economic impact of these partial lockdowns and restrictive measures. A drop in the composite number below the 50 level that separates expansion from contraction would put added pressure on the ECB to prepare further easing measures, and we would expect the euro to sell-off in that context.
US retail sales for September out last week were very strong, in spite of the fact that stimulus measures have yet to be renewed. Sales rose by more than 5% last month alone, with the market now expecting the US to recoup around two-thirds of the output lost due to COVID in the third quarter of the year.
The US election in the first week of November is starting to overshadow economic data out of the US. The latter will be in short supply this week, at any rate. Polls are showing a larger and more stable lead for the democrats than they did at this time in 2016, and risk assets should take comfort in that. The final presidential debate Thursday will provide the main focus for traders this week.