Ugly scenes in European markets as continent crashes towards Covid lockdown

Market Update

European equities are taking a further battering on Wednesday morning (Stoxx 600 -1.9%), with most indices trading at levels not seen since early June (though France’s CAC 40 hit lowest levels since May and the FTSE 100 hit lowest levels since April). European bond markets are also reflective of this morning’s strongly risk off tone; Core bonds are in high demand, with Bund yields at their lowest since the 13th of March, while peripheral (Italian and Spanish) yields are up. Focus is still very much on the pandemic; the jump in Covid-19 related infections, hospitalisations and deaths continues to alarm authorities and the coming winter lockdown restrictions look ever more draconian. Selling today comes on the back of what has already been a rough week for European equity markets; on the week, the Stoxx 600 is now down over 3.0%, and France’s CAC 40 down nearly 6%. With the news on the Covid-19 front unlikely to get better any time soon in Europe, it is hard to see when European equity markets might be able to get some respite.

The latest on the Covid-19 front;

France saw its daily Covid-19 related death count jump above 500 yesterday, while Covid-19 infected patients now occupy 57.5% of France ICU beds, up from 42.9% one week ago. A government spokesperson warned that the county could only be two weeks away from having the same number of people in ICU beds as during the first wave. Thus, the French government is now looking at a month-long national lockdown to combat the pandemic which could take effect from as early as this Thursday, with the announcement likely to come at 1900GMT/1500EDT when French President Macron delivers a national televised address.

Elsewhere in Europe, Germany is reportedly looking at a 2-week lockdown, which would see the closure of all non-essential businesses, as well as schools, and might also close the nation’s hospitality sector until the end of November. In the UK, PM Johnson is reportedly under pressure to enact harsher lockdown measures, as the daily death count continues to march higher (367 died of Covid-19 yesterday, the highest in five months).

The bad news is not just reserved for Europe; one newswire had Covid-19 deaths in the US rising to just shy of 1k yesterday, and daily reported infections was close to recent highs in the 70ks. Cases have reached record levels recently in more than 20 states, including Illinois, Tennessee, New Mexico, Nebraska and Utah. Only seven States are not seeing a rapid trend higher in infections rates.

Thus, US markets are fairing little better than their European counterparts, with S&P 500 futures trading 1.2% lower and US bonds firmly in demand. In terms of other asset classes, USD and JPY are dominant in FX markets, gold is under pressure but keeping its head above $1900 and crude oil markets trade in the red.

G10 FX

Unsurprisingly given broader risk off conditions, havens USD and JPY top the G10 performance table this morning. A post-EU cash open acceleration of selling in European equities has seen USD surge to highs for the week in the 93.30s, while USDJPY has maintained its broadly downwards trajectory on the week thus far, having this morning hit fresh lows since September of beneath 104.20.

AUD is the next best performer on the day, and trades only marginally lower on the day vs USD; AUDUSD was trading with strong gains, reaching highs of above 0.7150 before USD began picking up as the European session got under way, sending the cross back into the 0.7120s. A few domestic factors have been supporting AUD;

1) Australian Q3 CPI data is one factor supporting the Aussie; the inflation report was broadly firmer than expected, with the Q/Q rate of CPI coming in at 1.6% (exp. 1.5%). Moreover, the RBA’s trimmed mean measure came in at 0.4% Q/Q (exp. 0.3%) and 1.2% Y/Y (exp. 1.1%).

2) RBA Board Member Harper was on the wires last night and seemingly pushed back on negative rates; negative rates would result in cash hoarding, he said.

Meanwhile, as noted in yesterday’s Macro Daily, Australia has its own Covid-19 outbreak largely under control and Victoria is actually opening back up this week. This contrast to the worsening situation in other major developed economies is also likely to support AUD going forward (and NZD as long New Zealand keeps its outbreak under control as well, though this has not been the case this morning).

Then we have CAD, NZD, CHF, EUR and GBP, all down between 0.3-0.4% on the day vs USD, all trading as a function of USD strength. With very little by way of important Eurozone or UK data coming up today, USD dynamics looks set to continue to dominate the price action for EUR and GBP at least, though any comments regarding how the latest round of Brexit talks went when they end later today will of course be interesting. A rate decision from the BoC ought to offer some distraction for CAD this afternoon from global themes, even if rather fleeting.

In terms of the price action this morning; EURUSD has extended on losses since losing the 1.1800 handle yesterday and now trades in the 1.1760s, GBPUSD is attempting to press below the 1.3000 level as I type, USDCAD has burst back above the 1.3200 handle and NZDUSD has slumped to lows of the day and back below 0.6700 in recent trade.

Finally, NOK and SEK are this morning’s two worst performers in the G10, with NOK’s woes worsened by disappointing September core retail sales. The data out of Sweden was a little more upbeat this morning (though not enough to stem the SEK selling), with the Economic Sentiment Indicator rising to 96.3 in October, which according to Nordea, indicates “a strong recovery before the second wave of COVID-19 in Europe”. Swedish retail sales was also upbeat, rising 0.8% M/M in September (up from a -0.2% contraction the month prior).

The Day Ahead

1115GMT/0715EDT, ECB’s Hernández de Cos speaks online at “ESBG Retail Banking Conference 2020: Coping with crisis thanks to deep local roots” organized by the European Savings and Retail Banking Group.

1230GMT/0830EDT, US Advanced Goods Trade Balance (Sep)

1400GMT/1000EDT, Bank of Canada Rate Decision, 1500GMT/1100EDT Press Conference… Most analysts do not expect any major changes to BoC policy at tomorrow’s meeting; rates are seen being held at the bank’s effective lower bound (ELB) of 0.25% and the bank is expected to reiterate that policy will remain highly accommodative “until slack is fully absorbed” in its statement on monetary policy. Despite recent comments from the BoC Governor that NIRP is in the bank’s toolkit, most analysts do not see it as under active consideration. The tone of the statement is expected to be cautious; the bank will note how the North American economic recovery since July has been better than expected (hence the upgrade to the economic forecasts in the MPR) and may praise ongoing fiscal support in Canada. However, they will likely also point to growing risks posed by the worsening global state of the Covid-19 pandemic, sluggish domestic inflation and a lack of fiscal aid south of the border. Asset purchases is where things are somewhat more uncertain; the BoC has unwound a number of its more unconventional emergency liquidity programmes over the last few months, resulting in a contraction in the size of its balance sheet, but its flagship asset purchase programme is seen by most analysts as remaining unchanged at its current rate of CAD 5bln per week. The full Macro Intel BoC Preview can be found here:

1430GMT/1030EDT, Weekly EIA Inventories

2350GMT/1950EDT, Japanese Retail Sales (Sep)

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