The week remains on the shadow of stimulus given the self imposed midnight deadline set by Speaker Pelosi herself. The markets yesterday were on tenterhooks all day awaiting some news. A comment from her that “we’ll know where we all are” at the end of the day saw some of the optimism fade.
This theme continued today as the US Dollar is softer across the board amid a backdrop of buoyant Global Stock markets and declining risk premia. US House speaker Pelosi said that she is hopeful that a deal on fiscal stimulus can be reached this week. Wall Street was followed by a largely positive session for equities however the major indexes all drifted from their better than 1.2% peaks and lost the 1% handles as the day wore on given the lack of any further positive news. The prevailing upbeat mood could change in a flash. The Senate is unlikely to pass the sizeable package that the Democrats and White House appear to be narrowing in on. The upcoming US election poses event risk given the perceived risk of the outcome being contested, although the magnitude of Biden’s lead in the polls has attenuated this perception somewhat.
Meanwhile, the markets are also factoring in rising prospects for further central bank stimulus, especially in Europe where the trend toward increasingly draconian Covid measures is threatening a double dip recession. In Europe the chances that central banks will move to add additional stimulus sooner rather than later are rising with the spike in new Covid-19 infection numbers and the resulting tightening of lockdown restrictions, as this should be weighed against the reality of falling economic activity for unknown duration. Ireland, for instance, announced a ‘level 5’ full national lockdown, which will last six weeks. Wales is also entering a full lockdown, while even Sweden is implementing localised lockdown measures (on a voluntary basis). Even in Germany case numbers are now starting to rise at a worrying rate and the risk that Europe is heading for a double risk recession is picking up, which will keep central banks on high alert especially as there is no discernible progress on the Brexit front. According to NYT data, new cases in Germany are up 176% over the past two-weeks, with deaths up 169%. In France, the metrics show a 104% rise in cases and a 60% increase in deaths.
In the European markets meanwhile
Bund yields continue to move higher in opening trade, while peripheral Eurozone markets are slightly outperforming this morning, with spreads narrowing. Curves are steepening as the long end sells off, which also suggests that markets are increasingly waking up to the realisation that the flood of fiscal stimulus and central bank commitment to keep policy rates low for longer, will lead to higher inflation and a rising debt mountain down the line.
Among currencies, the USDIndex fell to a 1-month low at 92.65 in what is a fourth consecutive day of decline. The USD basket seems to be coming under mounting pressure once more with decisive negative candles the last 3 days. There have been some fluctuations in the outlook on USDIndex in September and October, with a formation of head and shoulder seen this period. Hence today the asset importantly retests the neckline of the latter. Hence if the asset manage to extend losses below neckline, this implies to an increasing negative outlook in the medium term. This could bring August lows initially at 91.70 Support level and the round 91.00 (138.2 Fibonacci extension).
Momentum indicators are mixed. The RSI is renewing its negative configuration, but MACD even though it turned negative it remains very close to neutral zone suggesting that there is still the possibility of consolidation. The next key move as stated earlier will be a closing breakdown below 92.65.
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Andria Pichidi
Market Analyst
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