Risk appetite rattled as Covid-19 cases surge in Europe

26th October 2020 – Macro Daily: Week Ahead

Market Update

Amid renewed focus on the worsening state of the Covid-19 pandemic, we are seeing a broadly risk off start the week; European indices trade with heft losses (Stoxx 600 -0.5%), US index futures (-0.9%) and crude oil markets are also in the red, while US and European bond markets, as well as USD are finding a bid from increased haven demand.

Both Italy and France reported record cases over the weekend; over 20k new cases were reported yesterday in Italy and over 50k in France, though French medical officials are reportedly estimating that there are currently over 100k new infections per day. Italian, Spanish and Belgium officials announced tighter lockdown restrictions over the weekend (restrictions on business and hospitality in Italy, a state of alarm in Spain with an overnight curfew, while Brussels has closed sporting & cultural facilities), while French officials are threatening further measures lie ahead. Unfortunately, the bad news is not just been coming from Europe; the US posted a record daily increase in infections over the weekend and China is struggling to contain a localised outbreak in Xinjiang.

The Covid-19 news has not all been bad; the Oxford Uni/Astrazeneca vaccine has reportedly triggered protective antibodies and T-cells in the elderly and the duo has resumed its vaccine trail in the US. Moreover, J&J’s recently halted trail is also reportedly set to resume soon. Nonetheless, as the northern hemisphere heads into winter (people spend more time indoors and viruses spread more easily), it seems reasonable to expect that things are going to get worse before they get better regarding state of the global spread of the virus, with tighter economic restrictions set to follow. Thus, risks of a “W” shaped recovery are rising.

G10 FX

As noted above, USD is putting in a solid performance today amid Covid-19 fear triggered risk off market conditions. DXY has managed to rally back to the 93.00 level from Sunday open levels around 92.70. Last Thursday’s 93.12 high and the 50dma at 93.26 could provide some resistance, while last week’s lows of just under 92.50 could provide support.

NOK, CAD and EUR are the worst G10 performers; the former somewhat unsurprisingly given that its high beta & correlation to risk appetite in general. Meanwhile, with a large part of the weekend’s bad Covid-19 news focused in Europe, particularly regarding new lockdown restrictions, perhaps it is also unsurprising to see EUR underperform, with traders also considering the impact the continued worsening of the European outbreak will have ECB thinking at this week’s meeting (most analysts expect the bank to signal more QE to come in December).

Thus, EURUSD has been generally on the back foot since the Sunday open, and has fallen to around 1.1830 from previously above 1.1850. This morning’s October German IFO data was largely shrugged off given we already had the more widely followed preliminary October PMI release last Friday (IFO showed a decline in business confidence, with the headline Business Climate Index dropping to 92.7 from last month’s 93.2).

The best performers aside from USD, are AUD and NZD, despite the market’s generally risk off feel; perhaps both are finding support as financial markets are reminded how well both Australia and New Zealand have generally managed to cope with the Covid-19 pandemic. Indeed, as the picture looks increasingly ugly in Europe and the US, Australia and New Zealand have the virus under control and are heading into Summer (people set to spend more time outdoors, reducing transmission). AUDUSD and NZDUSD currently both trade flat on the day vs USD, with AUDUSD having held up well above the 0.7100 mark and now trading in the 0.7130s and NZDUSD looking likely to soon test the psychological 0.6700 level.

Elsewhere, GBP, JPY, CHF and SEK are the middling G10 performers and all trading in the red against the strengthening buck. GBPUSD has managed to hold up well above the 1.3000 mark, amid a seemingly positive Brexit mood; EU Brexit Negotiator Barnier and team extended their stay in London by three days to Wednesday, although this is partly due to rising Covid-19 cases in Brussels, where increased restrictions have just been implemented.

Meanwhile, USDJPY has been pressing higher, though the cross for now remains contained below 105.00. Many banks have noted that JPY has been responding positively to tightening in the pre-US election polls between Biden and Trump that seemingly increase the chances of a risk appetite negative contested outcome; the RCP average of polls, having tightened by around 3% over the last two weeks, stabilised over the weekend, with Biden’s lead still at around 8% on average. With the election just over one week away, JPY would likely be the G10 winner amid any further declines in Biden’s lead.

The Week Ahead

With the US Presidential election in eight days, shifts in national and swing state polling will be closely scrutinised; as noted above, any movement in favour of a Trump re-election will likely be a risk appetite negative, given the increased odds of a contested outcome. Any movement in favour of Biden ought to ease fears and be risk appetite positive. As things stand now, according to the FT’s election calculator (which uses the latest RCP data), Biden has 207 electoral college votes, as well as 66 votes from states that are leaning in his favour. As long as he wins all of these states, he would get 273 electoral college votes (above the 270 needed for a majority) and would win the Presidency. Trump only has 83 solid votes and 42 that are leaning his way. 140 electoral college votes, including from the states of Texas, Florida, Ohio, North Carolina, and Arizona are all considered a toss-up. Even if Trump wins all of these, that will not be enough to secure the Presidency. He needs to get back some of the states that are currently leaning in favour of Biden; including Pennsylvania, Minnesota, Michigan, Wisconsin and Colorado.

Meanwhile, the worsening state of the global Covid-19 pandemic will also continue to dominate imagination, while markets might show greater fatigue towards tedious talks between the White House and Democrats on fiscal stimulus (which many have now come to conclusion is just a pre-election façade by both sides who are just making it look as though they are “trying to get something done”). Meanwhile, Brexit talks (also somewhat tedious at this point) will continue in London until the mid-week; most do not expect any movement towards compromise to come until closer to the new mid-November deadline the two sides agreed on last week.

Monday – A quiet start to the week. Out of the US, we have new homes sales (Sep); August saw the strongest pace of sales since September 2006. Wells Fargo think that “despite record-low mortgage rates, it will likely be difficult to sustain such a rapid pace of sales.” The bank reasons that “employment growth appears to be moderating, which may soon begin to cut into demand for housing… Inventories also remain low, suggesting builders are selling homes faster than they can build them.” Moreover, “lumber prices have begun to ease recently but remain very high, which may delay new construction.” Wells Fargo conclude that thought they expect new homes sales to remain strong in September, “some moderation in growth is likely in the months ahead”. Following US housing data we have SNB’s Jordan. In the evening, focus will be down under with the release of NZ trade balance data for September. Note also; Chinese leaders this morning commenced a three day meeting after which they will be unveiling the PRC’s 14th five year plan; ING think this could prompt more flows into Chinese asset markets.

Tuesday – Overnight focus will be on China industrial profits from September, followed by RBA’s Bullock just before the European session begins. In the European morning we then have the ECB’s latest lending survey (Sep). We then have the preliminary estimate of US durable goods orders (Sep) followed by US CB Consumer Confidence (Oct). In the evening we have weekly private crude oil inventories.

Wednesday – Australian CPI for Q3 will be the highlight of the overnight session. We then have Retail Sales numbers from the Scandis. The focus of the afternoon will be US advanced goods trade balance, followed by the Bank of Canada Rate decision and press conference, weekly EIA crude oil inventories. In the evening, focus will be on a speech from FOMC member Kaplan and Japanese retail sales.

Thursday – NZ confidence data from ANZ and Australian confidence data from NAB will be in focus overnight, as well as the Bank of Japan’s latest rate decision. In the European morning, we have German Labour Market numbers. Things get busy after Europe’s midday; we have US Q3 GDP numbers (a big rebound expected), the ECB Rate decision and press conference, German preliminary CPI (Oct), US weekly initial jobless claims data and then US New Home Sales. In the evening, NZ Building Consents and Japanese Industrial Production will be in focus.

Friday – A busy morning of Eurozone data, we have GDP numbers (first from the individual countries, then from the Eurozone on the whole), as well as individual country then Eurozone preliminary CPI data (Oct). In the early afternoon, we get US Core PCE and personal income & spending data (Sep), as well as Canadian GDP numbers (Aug). We then have US Chicago PMI (Oct), US Uni of Michigan Consumer Sentiment (Oct). In the early hours of Saturday morning, following market closure for the week, we get Chinese PMI numbers for October.

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