• Joel

USD, JPY Dominant With Markets in Turmoil: Here’s What Happened

It's been a rough day in financial markets.

Global equities are taking a beating; the S&P 500 currently trades with losses of close to 3%, while Europe’s Stoxx 600 has shed roughly 3.2%. MSCI World ETFs trade with losses of around 2% (this is an index made up of equities from all over the world).

Its not just equities getting crushed, in FX markets EM currencies (BRL, MXN, ZAR etc) and the most risk sensitive G10 currencies (AUD, NZD, CAD, SEK and NOK) are all getting crushed (the risk sensitive G10 currencies each over 1% lower on the day vs USD.

Meanwhile, haven assets are in high demand; USD and JPY are the big winners in FX, while developed market bonds have also caught a bid (aside from “peripheral” EU country government bonds, i.e. Italian and Spanish debt). The expectation is that gold is lower, given the stronger USD.

All in all then, a classic risk off move, and the most extensive we have seen this month. 

What has been going on then?

Covid-19 is what’s going on. More specifically, Europe is fast heading into lockdown (which of course will be devastating for its economic recovery from the first lockdowns back in March/April). Meanwhile, the virus continues to spread at an ever more concerning pace in the US, which in the short-run might mean the economy takes a hit amid increased consumer caution, but might also lead to the re-imposition of further lockdowns (especially if the democrats regain control after next week’s election). Here is the latest;

  • 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. German newspaper Bild claimed today that the planned lockdown will begin on the 2nd of November. The German government is reportedly looking at forming a compensation package of up to EUR 10bln for companies impacted by new lockdown measures, said sources today.

  • Moreover, the EU Commission today urged EU governments to step up their collective response to Covid-19 amid alarming spikes in the number of infections and called for a coordinated testing strategy in across EU states.

  • 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.

What next?

We have seen a definitive risk off shift in tone this week. Forecasts projecting positive economic growth in the Eurozone are being shredded and forecasts for global growth in Q4 downgraded amid the rising tide of Covid-19 cases globally.

If the news continues to worsen (infection, hospitalisation and death rates continue to deteriorate like they have been and more countries come closer to lockdown), it is hard to make any bullish arguments ahead of next week’s election.

On which note, that means next week’s election in just under 1 week might be the next opportunity for risk assets to outperform (given there is a “clear” winner, rather than having a fraught, contested outcome). 


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