This week brought what is starting to look like a reality check to markets, which have been too long ignoring the virus and jumping on the stock market march higher bandwagon. The last few months we have seen US election talk and Brexit play the dominant roles of direction, but rightfully this week, a week that has brought significant rises of cases and hospitalisations across Europe and the UK, the focus has been brought back to the short, medium and long term effects this will bear on communities and economies.
Across Europe rising case numbers have led to lockdowns and curfews being enforced across France, Germany, Czechoslovakia, and Holland as they seek to curtail the spread of the virus. With the ECB signalling they wish to see the effects of the second wave before committing to a stimulus plan we have seen the Euro fall from 1.1850 to just below 1.1700 on the week with Eurozone stocks falling more than international peers, with the DAX falling from 13,200 to 12,600. The success of the “circuit breaker” style lock downs that have been effectively implemented in China and New Zealand and borne enormous success in eradicating the spread of the virus are being seriously considered. Whilst this approach brings immediate hardship to employment and business, the long-term results of such action has seen health and economic prosperity return to China and brought New Zealand three weeks of zero cases across the country.
Europe has also been unaided by the implications of Brexit; this week seems to be ending much the same as the last few months despite the clock ticking down on the negotiations. Indeed, this week saw UK Prime Minister Boris Johnson’s self-imposed deadline for completion of negotiations come and go on the 15th. In what looks rather weak gamesmanship this deadline was set as a “we need the deal done by the date or we walk away”, the EU’s team naturally saw through this buff and made it clear they were only working towards the official deadline at the month's end. The Pound had an interesting week and strangely had its largest up move, when Johnson flopped on his hard deadline, meaning all was not then lost and hope prevailed that a deal could be reached. However, those gains were all but wiped out as the Pound gave up the 1.3000 handle and retreated sub 1.2900. Significant rises in Covid-19 cases across Northern England also weighed on the Pound and the PM brought what looks likely to be a stop-gap 3 tier system for local lockdowns, with London entering tier 2 on Thursday with the 3rd and most extreme tier meaning full lockdown which the UK government seem to wish to avoid at all costs. However it would not now be a surprise to see a 2 week full lock down imposed in the coming weeks.
Brexit negotiations remain ongoing, but with overnight signals from French Premier Macron that he simply will not give up on his fisherman, and the UK unwilling to concede their waters, this remains the sticking point of the negotiations, with middle ground seemingly impossible to find. For now, we expect the pound to continue heavy into month end or until significant concessions are made. The process will of course be unaided by the domestic issues of the virus, with EU Commissioner Von Der Leyen going into isolation overnight after a member of her team tested positive for the virus.
In the US, with Trump back and active campaign wise he appears weaker with campaign funds said to be running low in comparison to Biden, and him pulling spend in states where he feels the game is already lost. Indeed, the markets are pricing in a Biden victory, with only the magnitude of that victory seemingly in question with a clean sweep of the Senate and House being the more appealing to the markets. However, whilst our expectancy is that Biden wins, it cannot be forgotten that at this stage of the last election, Hilary Clinton held an 81% lead in the polls, so the race is most certainly not run. It was again a back and forth war of words on the US Covid aid package, as necessary funding became a political tool to the detriment of the people, and whilst it looks unlikely agreement can be reached ahead of the election, it remains possible Trump could commit to spending to increase populism. US stocks lost momentum this week as global health and earnings season took hold. The earnings seen to date are certainly not bad or beyond the realms of expectation but as yet over delivery has been stifled and naturally, the commercial banking sector struggled due to loan defaults.
The week ahead is relatively light on data, with a number of Central Bank speakers on Monday from the UK and US. Friday brings a raft of PMI data from the Eurozone, Australia, Japan, United States, and the UK. But as ever global infection rates must be monitored as well as US election, stimulus agreement talk and of course Brexit progress, or lack of as we are becoming sorely used to.
Monday - With IMF meetings all day on Sunday the first data we get of the new week is Chinese GDP, Industrial Production and Unemployment rate. With a relatively quiet day in Europe there are a number of Central Bank Speakers in the US session with the highlights being Lagarde of the ECB and Jerome Powell of the Fed Reserve, as well as some UK MPC speakers.
Tuesday - The day starts with the minutes of the Australian interest rate setting meeting. The data of the day is relatively low impact numbers with Swiss Trade Balance, German PPI, Eurozone Current Account and US Building Permits and Housing Starts.