Stock, currency and bond markets alike burst into life yesterday. Following the close of the German and French major stock market indexes some 4% in the Red, the price of assets across the globe started to reflect growing discomfort with the macro economy. US stock futures had initially shrugged off the sell-off taking place in Europe but equities succumbed to selling pressure at the US open with the S&P 500 eventually closing down 3.5% in line with France’s CAC index of blue chip stocks. Completing what would be referred to as a risk-off move, safehavens rallied at the expense of emerging market currencies. The US Dollar claimed upwards of half a percent back from the Euro and, at the peak of the sell-off, stood almost 1.5 cents stronger against the Pound. Commodity and emerging market currencies including the antipodeans (AUD&NZD), loonie (CAD) and the Rand also suffered. So what got markets in such a fuss?
Throughout the week rumours developed suggesting that initially France had not ruled out a full lockdown of the economy. These embers grew into the conjecture that France was now actively considering a return to a variety of its earlier lockdowns and eventually culminated in an announcement from French President Macron. Emmanuel Macron announced that from this Friday, people would only be allowed to leave home for essential work or medical reasons. The lockdown follows a pattern of rising cases and infection rates across Europe alongside much of the globe as China also announced its highest number of new daily cases in over two months.
Over the last week, the EU, Britain, Norway, Switzerland and Iceland have accounted for over 1.1 million cases of the virus alone. The rising number of new infections in Europe also prompted Germany to join France in introducing new lockdown measures. Stopping short of a full lockdown, Chancellor Merkel trod a path more similar to the UK’s ‘very high’ coronavirus threat level, closing parts of specific industries to limit the spread. The backdrop of increasing restrictions across Europe prompted markets to price in the reality of the second-wave of infections and the plethora of economic/financial implications therein. Against the gloomy backdrop, risk assets deteriorated. The Pound was particularly hard hit despite introducing no new measures due to the uncertainty surrounding the future of its international trading schedule following the end of the transition period this year and the rising number of domestic infections.
Several months ago, when the US was suffering record outbreaks of the virus, European assets were able to secure considerable gains at the expense of the ailing United States. However, given the rising number of cases and the risk of an election only a few days away the US is also under pressure. The risk that the election poses to US assets is compounded by the news of the reservation of millions of US Dollars by both Presidential campaigns spending to fuel the inevitable legal battle in the result of a contested election result on Tuesday. US markets were also taking note of the risk of potential government negligence in the remaining two month’s of Trump’s term in office should the President not secure a second term. The tightening of the polls also led US markets to price in the risk that Biden takes the White House but falls short of securing major elected institutions including the Senate, potentially limiting the next administration’s power to rule.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Overrated Rates The unwinding of USD implied short term interest rates shouldn’t be underestimated. Take a brief look at changes in FX swap pricing over the past few months and you’ll see just how significant those interest rate expectations have proved to be. Particularly within GBPUSD, the difference is enormous. Post-pandemic inflationary pressures affected the […]
From minutes to CPI If you are finding it harder than usual to digest the current financial climate then you are forgiven entirely. Almost intraday, sentiment is flipping between adjectives such as inflationary, deflationary, stagflationary, expansionary and contractionary to describe the same economic phenomena. That is largely being driven by a rapidly changing macro environment […]
Nonstop flight to nowhere And before you start wondering, no, this brief isn’t about some new route Qantas has launched to propel passengers an inconceivably long distance in one hit. What I refer to in the title of this briefing are the rapidly evolving growth and economic base case projections within the US. The debate […]