With Autumn’s arrival at hand
The virus has taken a stand
It won’t be defeated
Nor barely depleted
Thus, markets are absent demand
Risk is definitely on the back foot this morning as concerns grow over the increase in Covid-19 cases around the world. Adding to the downward pressure on risk assets is the news that a number of major global banks are under increased scrutiny for their inability (unwillingness?) to stop aiding and abetting money laundering. And, of course, in the background is the growing sense that monetary authorities around the world, notably the Fed, have run out of ammunition in their ongoing efforts to support economic growth in the wake of the government imposed shutdowns. All in all, things look pretty dire this morning.
Starting with the virus, you may recall that one of the fears voiced early on was that, like the flu, it would fade somewhat in the summer and then reassert itself as the weather cooled. Well, it appears that was a pretty accurate analysis as we have definitely seen the number of new cases rising in numerous countries around the world. Europe finds itself in particularly difficult straits as the early self-congratulatory talk about how well they handled things vis-à-vis the US seems to be coming undone. India has taken the lead with respect to the growth in cases, with more than 130,000 reported in the past two days. The big concern is that government’s around the world are going to reimpose new lockdowns to try to stifle growth in the number of cases, but we all know how severely that can impact the economy. So, the question with which the markets are grappling is, will the potential long-term benefit of a lockdown, which may reduce the overall caseload outweigh the short-term distress to the economy, profits and solvency?
At least for today, investors and traders are coming down on the side that the lockdowns are more destructive than the disease and so we have seen equity markets around the world come under pressure, with Europe really feeling the pain. Last night saw the Hang Seng (-2.1%) and Shanghai (-0.6%) sell off pretty steadily. (The Nikkei was closed for Autumnal Equinox Day.) But the situation in Europe has been far more severe with the DAX (-3.2%), CAC (-3.1%) and FTSE 100 (-3.5%) all under severe pressure. All three of those nations are stressing from an increase in Covid cases, but this is where we are seeing a second catalyst, the story about major banks and their money laundering habits. A new report has been released that describes movement of more than $2 trillion in illicit funds by major (many European) banks, even after sanctions and fines have been imposed. It can be no surprise that bank stocks throughout Europe are lower, nor that pre-market activity in the US is pointing in the same direction. As such, US future markets showing declines of 1.5%-2.0% are right in line with reasonable expectations.
And finally, we cannot ignore Chairman Powell and the Fed. The Chairman will be speaking before Congress three times this week, on both the need for more fiscal stimulus as well as the impact of Covid on the economy. Now we already know that the Fed has implemented “powerful” new tools to help support the US, after all, Powell told us that about ten times last week in his press conference. Unfortunately, the market is a bit less confident in the power of those tools. At the same time, it seems the ECB has launched a review of its PEPP program, to try to determine if it has been effective and how much longer it should continue. One other question they will address is whether the original QE program, APP, should be modified to be more like PEPP. It is not hard to guess what the answers will be; PEPP has been a huge success, it should be expanded and extended because of its success, and more consideration will be given to changing APP to be like PEPP (no capital key). After all, the ECB cannot sit by idly and watch the Fed ease policy more aggressively and allow the euro to appreciate in value, that would be truly catastrophic to their stated goal of raising the cost of living inflation on the Continent.
With all that in mind, a look at FX markets highlights that the traditional risk-off movement is the order of the day. In other words, the dollar is broadly stronger vs. just about everything except the yen. For instance, in the G10 space, NOK (-1.45%) is falling sharply as the combination of risk aversion and a sharply lower oil price (WTI -2.5%) has taken the wind out of the krone’s sails. But the weakness here is across the board as SEK (-0.8%) and the big two, GBP (-0.5%) and EUR (-0.45%) are all under pressure. It’s funny, it wasn’t that long ago when the entire world was convinced that the dollar was about to collapse. Perhaps that attitude was a bit premature. In fact, the euro bulls need to hope that 1.1765 (50-day moving average) holds because if the technicians jump in, we could see the single currency fall a lot more.
As to the emerging markets, the story is the same, the dollar is broadly higher with recent large gainers; ZAR (-2.0%) and MXN (-1.4%), leading the way lower. But the weakness is broad-based as the CE4 are all under pressure (CZK -1.3%, HUF -1.1%, PLN -0.95%) and even CNY (-0.2%) which has been rallying steadily since its nadir at the end of May, has suffered. In fact, the only positive was KRW (+0.2%) which benefitted from data showing that exports finally grew, rising above 0.0% for the first time since before Covid.
As to the data this week, it is quite light with just the following to watch:
|Tuesday||Existing Home Sales||6.01M|
|Wednesday||PMI Manufacturing (Prelim)||53.3|
|New Home Sales||890K|
The market will be far more interested in Powell’s statements, as well as his answers in the Q&A from both the House and Senate. The thing is, we already know what he is going to say. The Fed has plenty of ammunition, but with interest rates already at zero, monetary policy needs help from fiscal policy. In addition to Powell, nine other Fed members speak a total of twelve times this week. But with Powell as the headliner, it is unlikely they will have an impact.
The risk meme is today’s story. If US equity markets play out as the futures indicate, and follow Europe lower, there is no reason to expect the dollar to do anything but continue to rally. After all, while short dollar positions are not at record highs, they are within spitting distance of being so, which means there is plenty of ammunition for a dollar rally as shorts get covered.
Good luck and stay safe