I understand, and I fully sympathize with the current healthcare concerns worldwide as the second wave autumn Covid-19 surge is upon us.
Frankly, I think the market would be more surprised if it did not happen hence the relatively muted reaction via the currency market at the moment.
Of course, that could all go sideways if circuit breaker type mobility restrictions are imposed. Still, fingers crossed, we do not have to go through that nightmare again as I do not think the global economy could survive another March styled sudden stop.
While Covid-19 is a concern, I think more pressing worries is the market’s remarkable tendency for fear to build and volatility to rise about three weeks before events, even those that have been on the calendar for years.
We saw this with the Scottish referendum, Brexit, and the 2016 election, for example. So, it might be wise not to write off any shift lower as your usual Covid-19 driven temperamental market proclivities or risk-off vagaries.
Not to mention that an unprecedented fiscal and monetary policy response globally has provided a wave of liquidity for companies to surf, helping stave off defaults but sparking concerns over a resurgence in zombie firms.
US election volatility
Election day volatility has not eased unless you squint. And despite reports of widening election polls, there is no strong evidence that markets are now pricing a faster election resolution.
I am actually on tenterhooks right now, hoping Golden Week in China does not produce a significant flashpoint and dents the China lift-off. After all, China is the only economy firing on all cylinders and carrying the commodity market load right now.
We could be in a world of hurt if a resurgence in a significant Chinese activity centre comes to fruition. But more encouraging in my neck of the woods is we could see the Hong Kong-Singapore travel bubble soon.
In Europe, business shutdowns at the peak of mobility curtailment have raised concerns that a prolonged period of weak revenues could trigger a growing number of corporate bankruptcies, with adverse effects on financial stability and recovery speed.
With Covid-19 hitting the SME sector particularly hard, the number of companies at risk could end up higher than during the GFC. However, despite these concerns, the latest data on business insolvencies in most countries show a decline in Q2, according to UBS economist data.
Oil extends gains
Oil extended gains to its most robust levels in almost a week after a report pointed to a sharp draw in US crude stockpiles in the past week.
Oil support is all about the China lift-off while getting nudged along by increased refinery activity in two of Asia colossal oil consumers, China, and India, which has boosted global oil consumption bullishly for oil prices.
But even this oil bull says NO MAS as those gains look so precariously perched as traders are in hyperventilation mode over the extent to which governments may have to renew social mobility restrictions to control the coronavirus’s spread.
Fade the Pound and Euro rallies?
Some market elements are looking to fade Cable, and Euro rallies as a caution on these currencies extend beyond Brexit uncertainty as the cyclical challenges mount, including pressure for national lockdown.
A new three-tier Covid-19 alert system in the UK and a 9 pm to 6 am curfew in France’s largest cities from Saturday suggest these economies will end the year on the back foot, with monetary policy having scant room for further stimulus.
That leaves the onus on more fiscal spending to support activity.
A more optimistic tone seemed to emerge overnight as UK PM Johnson said they would not walk away from trade talks and continue to work towards getting a deal ahead of a call with the European Commission President von der Leyen.
GBPUSD jumped to 1.2980 in response before extending to just shy of the 1.3070 resistance. It has since drifted back down to 1.3000-10, which should continue to act as a short-term mini pivot again.
Reserve Bank of Australia’s dovish shift
RBA Governor Lowe made a notably dovish shift in his speech this morning, pushing AUDUSD through the 0.7145-50 support from around 0.7165, down to 0.7124 so far. I suspect the Antipodean trade will keep the sell-on-rallies game face on while the pair remains below 0.7170-90 with a degree of flexibility, watching broader risk sentiment.
AUDNZD went another leg lower on the back of dovish comments from RBA Governor Lowe earlier. With the spot where it is, levels might be decent to go long again as the RBNZ is still wearing the yellow jersey in the race to below the LBZ.
Thais Baht largely unmoved despite Thailand’s emergency decree
It was a relaxed reaction in FX markets to the announcement of an emergency decree earlier today in Thailand. FX spot and forward points are broadly unmoved after the order to ban gatherings of five or more people in Bangkok.
The baht is renowned for its resilience to political uncertainty over the past decade. Protests have been ratcheting up over the past three months, calling for the PM’s resignation.
However, the local equity market is less sanguine, underperforming the broader region with a 20% YTD decline.
China’s September inflation data printed weaker-than-expected. Inflation in the world’s major economies remains soft, with the US core CPI, for example, recording only a 0.15% m/m rise in September.
For China specifically, these data points should not detract from numbers on lending, exports, and imports for September, suggesting the economy is firmly in a cyclical upswing.
As such, USDCNH should not be supported on today’s CPI/PPI data, but not an overall game-changer.
Although predictably, USDCNH swaps came off quickly after the People’s Bank of China (PBoC’s) medium-term lending facility injection and China’s September inflation data were weaker than expected.