GBP Recovers as Brexit Talks Optimism Takes Over the Markets

GBP Recovers as Brexit Talks Optimism Takes Over the Markets

Last week, the pound sterling recovered against the US dollar, gaining 0.98 percent and closing Friday’s session at the 1.3040 level.

GBP RecoversThe pound sterling benefited from the optimism that took over the market regarding the post-Brexit talks. EU Brexit Negotiator, Michel Barnier said that a deal with the UK government is within reach, while a new round of negotiations were announced.

On Sunday, the Bank of England’s Governor, Andrew Bailey made a reference to the possibility of setting negative cash rates, though according to his comments the bank would only be willing to do so when the UK experiences an economic upturn.

“Our assessment of negative interest rates, from the experience elsewhere, is that they probably appear to work better in a more wholesale financial market context, and probably better in a nascent economic upturn,”  he said.

On Monday, the Bank of England’s Deputy Governor, Jon Cunliffe said that British hedge funds that rely on borrowed money to fund their financial activities should be scrutinized, given that they are a potential threat to financial stability.

On Wednesday the bank published the Consumer Price Index, which stood at 0.4 percent in September (month-to-month), after dropping 0.4 percent in the previous month and below the analysts’ expectations, who foresaw it to be at 0.5 percent. In yearly terms, the index stood at 0.5 percent, higher than the previous month’s 0.2 percent and remaining in line with the analysts’ expectations.

The Retail Price Index went up by 1.1 percent, below the analysts’ expectations who foresaw it to be at 1.2 percent and higher than the previous month’s 0.5 percent. The Producer Prices Index Core Output went up by 0.3 percent, after being at 0 percent in the previous month and over the analysts’ expectations, who foresaw it to be at 0.1 percent.

On Thursday, the Confederation of British Industry released the Industrial Trends Survey for October, which showed an improvement from September’s -48 percent, at -34 percent and way better than the analysts’ expectations, who foresaw it to be at -45 percent. Consumer confidence dropped to -31 in October, after being at -25 in September and worse than the analysts’ expectations, who foresaw it to be a -28.

The Bank of England’s  Chief Economist, Andy Haldane said during a conference at the National Institute of Economic and Social Research that the UK’s household spending is remarkably resilient, pointing out the US case and claiming that the UK could follow the same path.

On Friday, the Office for National Statistics published that Retail Sales went up by 4.7  percent, after climbing by 2.7 percent in August and way better than the analysts’ forecasts, who expected it to rise by 3.7 percent. In monthly terms, retail sales went up by 1.5 percent, after being at 0.9 percent in the previous month, and higher than the analysts’ expectations, who foresaw it to be at 0.4 percent.

IHS Markit reported that the preliminary Manufacturing PMI for October stood at 53.3, signaling a slower expansion of the sector compared to September’s, which stood at 54.1, and better the analysts’ expectations, who foresaw it to be at 53.1. The services PMI was at 52.3, below the analyst’s expectations, and showing a slower expansion of the sector, as the previous month’s figure stood at 54.

Australian Dollar Attempts to Recover

Australian Dollar Attempts to Recover

Regarding the state of the Australian financial system, the bank’s governing board commented that it remains resilient.

AUDSo far this week, the Australian dollar has advanced 0.10 percent against the US dollar, attempting to recover from last week’s losses.

Reserve Bank Assistant Governor Chris Kent said on Monday that the expansion of balance sheets is adding monetary stimulus and that the current attempt to ease the financial conditions is been greater than during the 2008 financial crisis. He also said that given the current economic outlook and the high unemployment levels, policy support may be needed for some time.

Regarding the employment levels, he commented that he wants the labor market conditions to be consistent with the bank’s 2-3 percent target range. Because of this, the bank does not plan to increase the cash rate until the inflation rate is in the target range.

On Tuesday, the Reserve Bank of Australia released its October minutes. The minutes state that the bank’s governing board agreed to maintain an accommodative policy as long as it’s needed. The members of the committee expressed their optimism for the global economic outlook, as they observed that the economy is now gradually recovering.

However, they highlighted that the continuation of this recovery depends on the containment of the Covid-19 pandemic, which so far has infected 41,487,185 individuals around the world and has killed 1,136,341. In Australia, 27,458 cases have been reported, as well as a death toll of 905. Recently the press reported that the Australian State of Victoria may have recorded the first known covid-19 reinfection in the country.

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The Bank’s governing board also discussed the possibility of implementing additional easing measures in order to support the economy, which is now experiencing its biggest contraction since 1930. The board commented that the third-quarter contraction was smaller than expected, as well as milder compared to the performance of other countries. They also highlighted that economic recovery is now happening in most of Australia, though in the State of Victoria (which recently dealt with a surge in the number of Covid-19 cases) the economic situation has been heavily affected due to the restrictions.

As per the unemployment levels, they expect it to be high for an extended period, so addressing this problem is now a priority. Economic recovery is expected to be slow and uneven, while they foresaw the inflation level to remain subdued, though refusing to rely on their forecasts to make decisions.

Regarding the state of the Australian financial system, the bank’s governing board commented that it remains resilient. If the sector gives signs of dysfunction, the bank is willing to make extra government securities purchases.

Due to the performance of the Australian dollar, the committee discussed the effects of larger balance sheet expansions (relative to the RBA’s) by other central banks, which were contributing to lower sovereign yields and its effects on the value of the Australian currency. They also discussed the bank’s forward guidance.

On Wednesday, the Melbourne Institute published the Westpac Leading Index, which attempts to measure economic activity. The index stood at  0.22 percent in September (month-to-month), after being at 0.49 percent in the previous month. The  Australian Bureau of Statistics reported that retail sales went down by 1.5 percent, after contracting by 4 percent in the previous month.

USD Recovers as Coronavirus Cases Rise in the Midwest

USD Recovers as Coronavirus Cases Rise in the Midwest

The Federal Reserve Vice Chairman, Richard Clarida praised the Central Bank and the Congress’ efforts to stimulate the economy, though warned that it may take more than a year to return to the pre-covid activity levels.

Last week the dollar recovered against a bundle of its main competitors, advancing 0.67 percent and breaking a two-week losing streak.

The coronavirus outbreak continues advancing in the United States, as cases soared in the Midwest. So far, 8,343,140 infections have been reported, while 224,283 have died. In the world, 40,023,135 coronavirus cases have been reported so far, as well as 1,115,599 total deaths.

Hopes for Democrats and Republicans are reaching an agreement on a stimulus package before the November 3 election faded after the Treasury Secretary, Steven Mnuchin said that he suspects that a stimulus package won’t be enacted before the elections.

At this point getting something done before the election and executing on that would be difficult, just given where we are and the level of detail, but were going to try to continue to work through these issues,” he said during a conference.

Next week, the Republican-dominated Senate is set to vote on two different stimulus proposals. The first one, which is set to be voted on Tuesday, is an attempt to extend the Paycheck Protection Program, while on Wednesday the already rejected “Skinny” bill, named that way because it’s only worth US 300 billion, way below the $2 trillion price tag that the Democratic party has demanded. For his part, President Donald Trump recently said that he is ready to sign a “big, beautiful stimulus”.

On Tuesday, the US Department of Labor Statistics reported that the  Consumer Price Index, excluding food and energy prices, climbed by 0.2 percent in September (month-to-month), lower than the previous month’s 0.4 percent, and remaining in line with the analysts’ expectations. In yearly terms, the consumer price index, excluding food and energy prices, climbed by 1.7 percent, lower than the analysts’ expectations, and remained unchanged from the previous month’s figure.  In yearly terms, the Consumer Price Index, including food and energy prices, climbed by 1.4 percent, remaining in line with the analysts’ expectations and over the previous month’s 1.3 percent, while in monthly terms it went up by 0.2 percent, below the previous month’s 0.4 percent and remaining in line with the analysts’ expectations.

On Wednesday the Producer Price Index was reported, as it stood at 1.2 percent (year-to-year) after being at 0.6 percent in the previous month and over the analysts’ expectations, who foresaw a 0.9 percent climb. In monthly terms, the Producer Price Index stood at 0.4 percent in September, over the analysts’ expectations who foresaw a 0.2 percent climb and higher than August’s 0.3 percent.

corona usdThe Federal Reserve Vice Chairman, Richard Clarida praised the Central Bank and the Congress’ efforts to stimulate the economy, though warned that it may take more than a year to return to the pre-covid activity levels.

On Thursday, the US Department of Labor reported that initial jobless claims increased to 898.000 from 845.000, more than expected as the surveyed analysts foresaw it to fall to 825.000. Continuing jobless claims went down to 10.018.000, from 11.183.000 and better than the analysts’ expectations, as they foresaw it to fall to 10.700.000.

The Federal Reserve Bank of Philadelphia reported that its Manufacturing Survey for October climbed to 32.3, from 15 in the previous month and way below the analysts’ forecast, as they predicted it to be at 14.

On Friday, the US Census Bureau reported that retail sales went up by 1.9 percent in September (month-to-month), way better than the 0.7 percent that the analysts expected and over the previous month’s 0.6  percent. The Board of Governors of the Federal Reserve published the Industrial Production figure, which showed a 0.6 percent contraction in September, after climbing by 0.4 percent in the previous month.

The University of Michigan reported that consumer confidence went up to 81.2 in October, from the previous month’s 80.4, better than the analysts’ forecasts, who expected it to be at 80.5.

GBP Breaks Two-Week Gaining Streak on Bad Economic Data

GBP Breaks Two-Week Gaining Streak on Bad Economic Data

The United Kingdom is now one of the most affected countries by the advance of the coronavirus pandemic in Europe, with 634,920 total cases as well as a death toll of 43,018.

So far this week, the pound sterling has lost 1.16 percent against the US dollar, breaking a two-week gaining streak ahead of an EU leaders’ summit that took place on Thursday and Friday.

The EU leaders are set to discuss the Brexit negotiations and are expected to give instructions to the EU Chief Negotiator, Michel Barnier regarding which steps he should take in order to advance with the negotiations, as the year-end deadline approaches. The media has reported that they plan to say that the progress in talks with the United Kingdom is still not sufficient to reach a trade deal and that they’re instructing the Chief Negotiator to intensify the talks with the British government, they may be discussing which concessions they can make to the United Kingdom for the sake of advancing with the negotiations.

Britain insists on barring EU members from its fishing waters, a proposal that is considered outrageous given the United Kingdom’s aspirations to stay within the EUs energy single market. About this issue, the German Chancellor, Angela Merkel commented that the European Union would need to be more realistic” in compromising on fishing rights, highlighting that reaching a deal should be in the interests of both parts. Moreover, progress on talks about trade and security issues are now essentially stalled, which adds pressure.

The United Kingdom is now one of the most affected countries by the advance of the coronavirus pandemic in Europe, with 634,920 total cases as well as a death toll of 43,018. Given the recent surge in the number of cases, Prime Minister Boris Johnson announced a new three-tier restrictions system. Most of the country is currently on the lowest tier, though places like the Liverpool region will have to face the toughest restrictions.

On Monday, the Bank of England’s Governor, Andrew Bailey commented that the British economy could struggle more than expected to recover from the effects of the sanitary crisis in the economy.

GBP breaks winning streakWe think the risks, unfortunately, are all on the downside,” he said during a question and answer session. On Tuesday, after he was asked if the bank was planning to do so,  he added that for now, the bank is not discussing whether imposing negative cash rates, so currently, the bank’s monetary policy committee is not in a position to say if it is a tool they would employ.

Bailey’s claims come after the Bank of England policymaker, Jonathan Haskel said that the bank has an open mind about the possibility of cutting cash rates below zero, adding that despite the fact that it could affect the banking system’s profits, the measure could have a positive effect on the British economy as a whole.

The British Retail Consortium reported that retail sales rose by 6.1 percent in September (year-to-year), lower than expected, as the surveyed analysts foresaw it to rise by 8.2 percent, but higher than August’s figure, which stood at 4.7 percent.

On Tuesday, the Office for National Statistics recently reported that the Unemployment Rate from June through August 2020 stood at 4.5 percent, rising more than expected and higher than the previous period final number. The claimant count rate rose by 7.6 percent in September, while the number of unemployed people went up by 28,000. Average earnings remained unchanged in the three months to August, after dropping by 1 percent in the previous period. Excluding bonus, average earnings gained 0.8 percent, after going up by 0.2 percent in the previous period.

Canadian Dollar Advances Despite Surge in Coronavirus Cases

Canadian Dollar Advances Despite Surge in Coronavirus Cases

The bank of Canada Tiff Macklem said on Thursday that it’s certain that the Canadian government will exit the pandemic with higher public debt levels. 

Last week, the Canadian Dollar gained 1.45 percent against the greenback, advancing for the second consecutive week.

USD/CADSo far, 180,179 coronavirus cases have been reported in Canada, while the death toll is at 9,608. Given the recent rise in the number of COVID-19 cases in certain zones, new restrictions have been imposed by the Ontario government, like limiting indoor dining at restaurants and bars, as well as closing movie theatres, gyms, and casinos.

On Tuesday, Canada’s national statistical agency reported that imports amounted to 47.38 million in August, after being at 47.93 billion in the previous month. Exports amounted to 44.93 million in the same month, after being at 45.4 billion in July. International Merchandise Trade, which registers the difference in the value of imports and exports of Canadian goods (excluding services), stood at -2.45 billion, way below the analysts’ expectations, who foresaw it to be at -0.29 billion and after being -2.53 billion in the previous month.

On Wednesday, the Richard Ivey School of Business published the Ivey Purchasing Managers Index for September, which signaled a slower expansion of the business sector in four months, at 61.1 after being at 64.6 in the previous month. The seasonally adjusted PMI was at 54.3, signaling a slower expansion, as the previous month’s PMI stood at 67.8.

On Thursday, the Canadian Mortgage and Housing Corporation reported that new residential construction projects dropped to 209.000 (year-to-year), fewer than what the surveyed analysts expected, as they foresaw it to be at 240.000, and after being at 261.500 in august.

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The bank of Canada Tiff Macklem said on Thursday that it’s certain that the Canadian government will exit the pandemic with higher public debt levels. He highlighted that without the fiscal and monetary policy actions that have been taken since the beginning of the pandemic the economic devastation would have been higher.

As much as a bold policy response was needed, it will inevitably make the economy and financial system more vulnerable to economic shocks down the road,” he said during a video conference with a financial risk management group, Without the fiscal and monetary policy actions, the economic devastation of the pandemic could have been much, much worse,” he added.

Macklem also commented that full economic recovery will take a long time while asking the public to practice physical distancing in order the avoid the uncontrollable spread of the virus and a second lockdown.

On Friday, Canada’s national statistical agency reported that the Unemployment Rate fell to 9 percent in September, lower from what the analysts expected as they expected it to fall to 9.7  percent, and below the previous month’s figure which stood at 10.2 percent in the previous month. The Participation Rate stood at 65 percent, after being at 64.6 percent in the previous month and over the analysts’ expectations, who foresaw it to be at 64.8 percent.

Average hourly wages went up by 5.43 percent, after being at 6 percent in the previous month, while Net Change in Employment was at 378.200, higher than the previous month’s figure, which stood at 245.800 and over the analysts’ expectations, who foresaw it to be at 156.600.

US Dollar Weakens as Trump Pauses Stimulus Talks

US Dollar Weakens as Trump Pauses Stimulus Talks

So far this week, the US dollar has lost 0.32 percent against a bundle of its main competitors, falling for the second consecutive week.

Last week, US President, Donald Trump confirmed that he is infected with the coronavirus. Despite the concerns regarding the health of the president, Trump was finally discharged from the hospital, returning to the oval office this week. According to his doctor, the president has had no symptoms for more than 24 hours, while being fever-free for more than 4 days.

Many criticized Trump’s late behavior, given his tendency to underplay the virus. In any case, he seems to be doing well and took the opportunity to announce his decision to withdraw from the stimulus talks with the Democratic party, promising to pass a bill after the November elections.

“I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major stimulus bill that focuses on hardworking Americans and small business,” he posted on his Twitter account.

This caused unease across the US stock markets, which closed in the negative territory at the end of Tuesday’s session.

Afterward, he said on his Twitter account that he is willing to sign a stand-alone bill for stimulus checks. He also called the Democrats to approve a 25 billion dollars stimulus for the airline sector, as well as a paycheck protection program for small businesses that is worth 135 billion dollars.

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Trump’s latest announcements relieved investors, making US stocks recover from the previous session’s losses.

The United States continues dealing with the Covid-19 sanitary crisis, which so far has killed 216,784 Americans and has infected 7,776,224. The United States leads the world in the number of infections, followed by Brazil, India, Russia, and Colombia. Cases are currently surging in 39 states, as states like Wisconsin have doubled its number of reported cases in the last month, all while Trump’s latest declarations about the issue keep alarming the medical community.

This week the markets received a few relevant pieces of information about the state of the US economy. On Monday, Markit economics released the Services PMI for September, which stood at 54.6, remaining unchanged from the previous month’s figure and signaling an expansion of the sector. The composite PMI figure signaled a slightly lower expansion of the business sector, standing at 54.3 in September, below August’s 54.4 and lower than what the analysts’ expected.  According to the Institute for Supply Management, the services PMI stood at 57.8, improving from August’s 56.9 and over the analysts’ expectations, who foresaw it to be at 56.3.

On Tuesday, the Bureau of Economic Analysis reported a 67.1 billion dollars deficit in the trade balance, after being at -63.4 billion in the previous month, and higher than the analysts’ expectations, who foresaw it to be at -66.1 billion. The Federal Reserve Chair, Jerome Powell called for additional fiscal stimulus, saying that it’s preferable to do too much than too little and claiming that economic recovery will be stronger and faster if monetary policy and fiscal policy “continue to work side by side”.

On Wednesday, the Federal Reserve released the FOMC minutes. In the minutes, the bank’s monetary policy committee stated that they are not willing to raise the interest rates until the economy reaches full employment and inflation reaches the bank’s 2 percent target. The Federal Reserve officials also expressed their concerns about the threat that the lack of help from the Congress poses for economic recovery.

Pound Sterling Recovers on Brexit Deal Hopes

Pound Sterling Recovers on Brexit Deal Hopes

Bank of England Governor Andrew Bailey commented that despite the bank being realistic in regards to the possible challenges that negative interest rates could pose for the British financial system, they’re not ruling out imposing them as an attempt to aid the performance of the economy.

BOELast week, the pound sterling recovered from the previous week’s losses, gaining 1.46 percent and closing Friday’s session at the 1.2931 level.

Conversations between the UK and the European Union continued last week, hinting the possibility of reaching a Brexit trade deal. Despite the final round of official negotiations ended without any important advance, the EU Commission President Ursula von der Leyen held a call with the UK prime minister Boris Johnson, agreeing on the importance of finding an agreement and convincing both sides that reaching an accord is possible.

The pound rose ahead of the meeting on Friday, closing the session and the week in the positive territory, and recovering from the previous week’s 1.32 percent loss.

Last week the markets got a few important pieces of information about the state of the British economy. On Tuesday, the  Bank of England reported that net lending to individuals stood at 3.4 billion pounds in August, dropping from July 3.9 billion pounds (month-to-month). Consumer credit stood at 0.3 billion pounds in August, after being at 1.052 billion pounds in the previous month and below the analysts’ expectations, who foresaw it to be 1.45 billion pounds.

In monthly terms, M4 money supply dropped by 0.4 percent in August, after advancing by 0.8 percent in July and considerably below the surveyed analysts forecast, which was at 1.3 percent. In yearly terms, the money supply expanded by 12.1 percent in August, after being at 13.4 percent in July. Mortgage approvals rose, going  66,300 in July to 84,700 in August, over the analysts’ expectations, who foresaw a 71,000 expansion. The shop price index was at -1.6 percent in August (year-to-year), remaining unchanged from the previous month’s figure.

Bank of England Governor Andrew Bailey commented that despite the bank being realistic in regards to the possible challenges that negative interest rates could pose for the British financial system, they’re not ruling out imposing them as an attempt to aid the performance of the economy.

That does not mean to say that we rule out using negative interest rates for a moment,” he said after pointing out that the big share of retail deposits in the UK’s banking system could undermine the effectiveness of imposing negative cash rates, It means to say we are realistic enough, I think, to know that the transmission mechanism would be affected,” he added.

On Wednesday, the Office for National Statistics reported that total business investment stood at -26.1 percent in the second quarter (year-to-year) after contracting by 31.3 percent in the previous quarter. In quarterly terms, it went down by -26.5 percent after dropping by 31.4 percent in the previous quarter.

Nationwide housing prices increased by 0.9 percent (month-to-month) in September, after being at 2 percent in August and over the analysts’ expectations, who foresaw it to be at 0.5 percent. In yearly terms, housing prices climbed by 5 percent, after advancing 3.7 percent in the previous month and over the 4.5 percent expected by the analysts.

The current account for the second quarter came at 2.8 billion pounds, below the analysts’ expectations who foresaw it to be at -0.4 billion, and after being at -20.814 billion pounds in the previous quarter. The Gross Domestic Product contracted by 19.8 percent in the second quarter (quarter-to-quarter), better than expected, and improving from the previous quarter’s 20.4 percent drop. In yearly terms, the Gross Domestic Product went down by 21.5 percent, after dropping by 21.7 percent in the previous quarter.

On Thursday, Markit Economics together with the Chartered Institute of Purchasing & Supply reported that the manufacturing sector expanded in September, announcing that the manufacturing PMI stood at 54.1, though slightly worse than August’s 54.3.

The Bank of Englands chief economist Andy Haldane highlighted that the economy has recovered faster than expected, saying that conditions for imposing negative rates have not been satisfied yet.

Euro Recovers as Coronavirus Cases Surge in Europe

Euro Recovers as Coronavirus Cases Surge in Europe

Previously, Lagarde said that the ECB is ready to deploy more monetary stimulus to aid the Eurozone’s economic recovery. 

EUR/USDThis week the Euro has recovered, gaining 0.90 percent, and breaking a two-week losing streak.

Recently, the European Central Bank President, Christine Lagarde hinted at a possible change in the bank’s inflation target, commenting that given the current low inflation the concerns policymakers are facing are different. This calls for a change in the bank’s current monetary policy strategy, which would strengthen the bank’s capacity of monetary policy to stabilize the economy when facing the lower bound.

Previously, Lagarde said that the ECB is ready to deploy more monetary stimulus to aid the Eurozone’s economic recovery. 

“ECB stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry,” she said.

Lagarde also linked the deflationary forces with the late appreciation of the Euro, which has appreciated since May, despite losing some ground last month. She said that the bank would continue monitoring the euros strength, though didn’t hint any possible intervention in the foreign exchange market.

Coronavirus cases are currently surging in Europe, with 5,042,794 reported cases (including Russia) as well as 222,765 total deaths. In the Eurozone, Spain leads in the number of infections, with 769,188 total cases as well as a death toll of 31,791, followed by France, the UK, and Italy.

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Fears for a second wave are increasing, given the surge of cases in countries like Spain, Germany, and France. Governments are already announcing measures to curb the advance of the virus, for example, the German Chancellor Angela Merkel announced the government’s plan to act regionally this time, with the purpose of avoiding another national lockdown, while the United Kingdom government made the decision to impose a curfew on pubs, bars, and restaurants, a move that has been heavily criticized by the leisure sector representatives.

On Monday, the markets learned that services sentiment stood at -11.1 in September, improving from the previous month’s -17.2 and way better than what the analysts expected, as they foresaw it to be at -15.3. In line with the analysts’ expectations, consumer confidence stood at -13.9, improving from August’s -14.7, while Industrial Confidence stood at -11.1, below the analysts’ expectations who foresaw it to be at -9.5, but better than August’s figure, which stood at -12.8. Business Climate was at -1.19, improving from August’s -1.34 and better than the -1.38 that the analysts expected.

On Thursday Markit Economics published the Manufacturing PMI for September, which was at 53.7, signaling an expansion of the manufacturing sector and remaining unchanged from the previous month’s report.

Eurostat confirmed Europe is now facing deflationary pressures, as the producer price index managed to contract by 2.5 percent in August (year-to-year) after going down by 3.1 percent in the previous month. Surveyed analysts expected it to contract by 2.7 percent. In monthly terms, the producer price index climbed by 0.1 percent in August, remaining in line with the analysts’ expectations and below the previous month’s figure, which stood at 0.7 percent.

The unemployment level slightly rose in August, at 8.1 percent, in line with the expectations of the surveyed analysts and over the previous month’s 8 percent.

Winter is Coming; Are Markets Getting Ready?

Winter is Coming; Are Markets Getting Ready?

 When things are bad, it often seems like the end of the world; when they’re good, it feels like the party’s never going to end. 

There’s an old saying, “make hay while the sun shines,” meaning that you should make the most out of your opportunities while they last. The adage is particularly relevant to our financial markets of late, as it seems investors have been taking it quite literally over the course of the summer. Even as markets across the board were falling following the worldwide spread of the coronavirus, the urge to find the right dip to buy became ever harder to resist. At the time, with flu season out of the way (at least in the northern hemisphere), we witnessed a powerful recovery as well as an increase in confidence that the worst was behind us, that a vaccine was just around the corner, and that a full return to growth was on the cards for 2021.

Of course, collective sentiment tends to overshoot on both the upside and the downside. When things are bad, it often seems like the end of the world; when they’re good, it feels like the party’s never going to end. What we seem to be witnessing now is a moment of collective sobering up. Winter is coming, COVID-19 cases are on the rise again, further lockdowns appear to be in store, and investors don’t want to be caught wrong-footed like they were back in March.

Market Sell-Off

Following the slump in US equities that we saw in early September from their all-time highs, the S&P 500 has attempted to bounce, stalled at the 3422 level between September 8-10, unsuccessfully retested the same level between September 15-16, and has since set a new lower-low at around 3230. We’ve seen the Dow Jones Industrial Average and Nasdaq do much of the same thing, with the S&P 500 and Nasdaq recently hitting levels last seen in July, and the Dow Jones since early August. On Monday, September 21, for the first time since February, the S&P 500 posted losses on four consecutive days. It ended around 10% down from the record high the index set on September 2.

SP 500

As is routinely the case, each bounce is met with a great deal of fanfare. The S&P 500 is currently up around 2.9% off those lows, but there could be further selling in store. The attempted bounce we’re seeing is currently being led by tech giants Amazon and Apple. The other usual subjects in the technology space (Microsoft, Alphabet and Facebook) have, in combination, fuelled the US stock market’s improbable post-COVID-19 rally and have also posted slight gains since the sell-off.

Market Worries

What we’re seeing now is a period of coming back down to earth and a tentative recognition that perhaps stocks rallied too hard through the summer to become overpriced relative to the risks. The first of the unknowns weighing on investors’ animal spirits is whether Congress will approve further stimulus measures before the November election. This was echoed by Fed chairman Jerome Powell, who has publicly called for further fiscal support from the government. With the unemployment benefits and other stimulus measures of the CARES Act having recently expired, the big question on everyone’s lips is whether a deadlocked Washington will manage to put together another package.

US-China tensions are also continuing to rise with President Trump gunning for the Chinese tech platforms. Citing data privacy and national security concerns, the US Department of Commerce has recently launched a series of measures that will severely curtail the US activities of Chinese tech companies like TikTok and WeChat.

In other news, the recent death of Supreme Court Justice Ruth Bader Ginsberg has added further tensions in an already fraught election run-up as Republicans and Democrats begin an acrimonious battle over who is to replace her.

All the above is taking place amidst an uptick in coronavirus cases. Aside from the United States, the top 15 list of daily coronavirus cases has been dominated by the developing world throughout the summer (mostly South America, India and Russia). Recently we’ve seen Spain and France re-emerge with an explosion in daily cases and now the UK is also making its way back up the list. On Sunday, September 20, the UK reported 4422 cases, the highest case count since May. With new cases and hospital admissions doubling every week, it’s now becoming apparent to leaders in the northern hemisphere that a second wave is almost upon us, that the relaxation of measures throughout the summer and encouragement of the public to go out and spend, has given the virus a foothold just as the flu season is about to begin.

Tesla in the Spotlight

The stocks that run the hardest during the irrational exuberance of a rally can be the ones that sell-off the hardest when outlooks begin to change. Pre-COVID, Tesla peaked in February at around $193 per share. Post-COVID it surged to around $360 in July and then catapulted to $500 in late August to the complete bemusement of most onlookers.

Tesla

Tesla stock was hit particularly hard during this recent sell-off. On September 8 it gapped down upon opening and went from $417 on Friday’s close to around $330 on Tuesday’s close. That’s a more than 21% drop, the worst single-day performance in the company’s entire history, which wiped more than $80 billion from the company’s valuation. From peak to trough, Tesla corrected by over 34% in September. True to form, the rebound has been even more impressive, having bounced by more than 38% since the September 8 low to set a lower-high at around $463.

Aside from the technicals, what else is weighing on Tesla’s much-loved story stock? Well, for one, it was widely anticipated that the company would be added to the S&P 500. This did not come to pass as the committee responsible for vetting new entries decided against the addition. More recently, the company’s CEO, Elon Musk, has stated that the company may experience difficulties in scaling up production following an analyst’s warning that its heavy reliance on aluminium parts could pose problems. Finally, even though the stock behaves and is often treated as a sort of honorary tech stock, the reality is that it’s an auto manufacturer that could be severely affected by the second wave of coronavirus infections and lockdowns. This is due to supply chain disruptions but also shifting priorities among consumers if the global economy is due to suffer another hit. Tesla is definitely a stock to watch as the potential downside is great should the worst come to pass, as well as the inevitable bounces following each sell-off.

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HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East. 

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

References:

https://www.theguardian.com/business/2020/sep/21/us-stock-markets-fall-dow-drops-510-points-coronavirus-fears

https://uk.reuters.com/article/usa-stocks/us-stocks-nasdaq-sp-500-crawl-higher-on-amazon-apple-boost-idUSL3N2GJ2HV

https://www.voanews.com/economy-business/us-stocks-fall-global-markets-swoon

https://www.barrons.com/articles/global-stocks-slump-on-worries-over-infections-gridlock-and-money-laundering-allegations-51600680149

https://www.straitstimes.com/business/companies-markets/us-stocks-advance-cautiously-after-powell-mnuchin-testify

https://www.worldometers.info/coronavirus/

https://www.bbc.com/news/business-54234006

https://www.cnbc.com/2020/09/08/tesla-shares-slump-10percent-in-premarket-trading-after-sp-500-snub.html

AUD Drops as RBA is Considering Forex Market Intervention

AUD Drops as RBA is Considering Forex Market Intervention

On Wednesday, the  Australian Bureau of Statistics reported the preliminary retail sales figure, which showed that retail sales dropped by 4.2 percent (month-to-month) in September, after climbing by 3.2 percent on the previous month.

AUDLast week, the Australian Dollar went down by 3.59 percent against the US dollar, breaking a two-week gaining streak.

The Reserve Bank of Australia deputy governor Guy Debelle expressed his concerns about the value of the Australian dollar on Tuesday, going against the analysts’ expectations, who thought that he wasn’t going to comment on the issue given the belief that the Australian Dollar late performance has been mainly linked with the US dollar weakness. Last week the US dollar recovered against a bundle of its main competitors, gaining 1.85 percent and recovering from the previous week’s losses.

Debelle highlighted that a lower exchange rate would benefit the economy, which the markets interpreted as opening up the possibility of intervening in the foreign exchange market to lower the Australian Dollar value, something similar to what the Swiss National Bank has been doing to stop the appreciation of the Franc.

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The Deputy Governor also left the doors open for further interest rate cuts, which implies that the RBA eventually may consider imposing negative cash rates, though he pointed out that there is still room to bring down the cash rates without entering into the negative territory. About this alternative Debelle commented that the evidence is mixed concerning its effects on the exchange rate.

“The empirical evidence on negative rates is mixed. In the short-term, they can contribute to a lower exchange rate. In the medium term, the effectiveness can wane including through the effect on the financial system,” he said, adding that it can encourage households to save more, especially in an environment where they’re inclined to do so.

The Reserve Bank of Australia’s monetary policy committee is expected to meet next week and announce its monetary policy decision afterward. Until then, it may not be clear whether they’re willing to consider this alternative or not.

Last week the markets got important information about the state of the Australian economy. On Tuesday, the Commonwealth Bank of Australia together with market economics released the preliminary Commonwealth Bank Services PMI for September, which stood at 50, showing an expansion of the services sector. In August the indicator stood at 49, signaling a contraction in the sector, while the analysts foresaw it to be at 48.4. The Manufacturing PMI, which stood at 55.5, showed a faster expansion of the manufacturing sector, given the 53.6 of the previous month. Analysts foresaw a contraction, as they expected it to be at 48.3.

The composite PMI stood at 50.5, showing an expansion of the business sector. The previous month’s figure signaled a contraction, as it stood at 49.4. On Wednesday, the  Australian Bureau of Statistics reported the preliminary retail sales figure, which showed that retail sales dropped by 4.2 percent (month-to-month) in September, after climbing by 3.2 percent on the previous month.

On Friday, the Australian Bureau of Statistics published that the preliminary trade balance for August registered a surplus at $4,294 million, after being at $4607 million in the previous month. Imports fell by 7 percent after climbing 7 percent in July, while exports dropped by 2 percent after falling by 4 percent in the previous month.