The working assumption had been
That governments soon would begin
To lift their restrictions
Across jurisdictions
From Lisbon to well past Berlin
 
But Covid had other designs
By spreading, despite strict guidelines
So, growth has now faltered
And views have been altered
Regarding recovery times
 
Remember how smug so many publications around the world seemed when comparing the spread of Covid in the US and throughout Europe?  The narrative was that despite a devastating first wave in Italy and Spain, nations on the Continent handled the situation significantly better than the chaos occurring in the US.  Much was blamed on the different types of healthcare systems, and of course, there was significant opprobrium set aside for the US president. But a funny thing has happened to that narrative lately, and it was reinforced this morning by the preliminary PMI data that was released.  Suddenly, the growth in Covid cases throughout Europe is expanding to what seems very much like a true second wave, with France and Spain leading the way, each reporting more than 10,000 cases yesterday, while in the US, we continue to see a true flattening of the curve.  The discussion in many European countries is whether or not to impose a second lockdown, as governments there try to decide if their economies and budgets can withstand such an outcome.  (I don’t envy them their choice as no matter the outcome, some people will suffer and scream loudly about the decision.)
 
But a funny thing seems to be happening within economies, despite this government wariness to act, people are making the decisions for themselves.  And so, service businesses are seeing real declines in activity as people naturally avoid restaurants, travel and entertainment companies.  And that’s just what the data shows.  PMI Services surveys showed significantly worse outcomes in France (47.5 vs. 51.5 expected), Germany (49.1 vs. 53.0) and the Eurozone as a whole (47.6 vs. 50.6).  In other words, it appears that people are pretty good at self-preservation, and will not put themselves knowingly at risk without a good reason.  Getting a pint at the local pub is clearly not a good enough reason.
 
For elected policymakers, however, this is the worst of all worlds.  Not only does economic activity contract, for which they will be blamed, but they are not making the decisions for the people, which appears to be their primary motivation in so many cases.  Of course, there is a class of policymakers to whom this outcome is seen as a pure benefit…central bankers.  It is this group who gets to continue to preen about all they have done to support the markets economy, and while the Fintwit community blasts them regularly, the bulk of the population sees them as saviors.  Central banking continues to be a pretty good gig.  Lots of power, no responsibility.
 
Meanwhile, the investment community, including those blasting the central bankers on Fintwit, continue to take advantage of the ongoing central bank largesse and pump asset prices ever higher.  While there was a very short correction back at the beginning of the month, now that merely seems like a bad dream.  And if the data continues to turn lower, the one thing we know is that central banks will step further on the accelerator, announcing greater asset purchase programs, and potentially dragging a few more countries (is the UK next?) into the negative rate world.
 
But that is the world in which we live, whether or not we like it, or agree with the policies.  And as our focus is on markets, we need to be able to describe them and try to understand the evolving trends.  Today, and really this week, that trend continues to see the dollar grind higher despite the fact that we have seen both up and down equity market activity.  In other words, this does not appear to be simply a risk-off related USD rally.  Rather, this appears to be a USD rally built on short-term economic fundamentals.  Remember, FX is a relative game, and even if things in the US are not great, if they are perceived as better than elsewhere, that is sufficient to help drive the value of the dollar higher.  One other thing to note regarding the current market activity is that the hysteria over the dollar’s ‘imminent collapse’, which was all the rage throughout the summer, seems to have completely disappeared. 
 
So, turning to this morning’s session, we find equity markets in the green around the world.  Yesterday’s US rally was followed by a fairly dull Asian session (Nikkei -0.1%, Hang Seng +0.1%) but Europe has really exploded higher.  It seems that the weakening economic data has convinced investors the ECB will be even more active in their policy mix, thus adding more support to equity markets there.  Hence today’s gains (DAX +1.6%, CAC +1.8%, FTSE 100 +2.3%) are a direct response to the weaker data.  It appears we are in the bad news is good phase for investors.  Not to worry, US futures are also pointing higher, albeit not quite as aggressively as we are seeing in Europe.
 
Bond markets remain somnolent as 10-year Treasury yields are at 0.675%, essentially unchanged from yesterday and right in the middle of the tiny 7 basis point range we have seen since September 1st.  (For those of you who were disappointed the Fed did not announce yield curve control, the reason is that they already have it, there is no need to announce it!)  At the same time, German bunds are unchanged on the day, and also mired within a fairly tight, 10bp range.  But the ongoing winners are Italy and Greece, who have seen their 10-year yields decline by 2 and 3 basis points, respectively today, with Italy’s down more than 25 basis points since the beginning of the month.
 
The strong dollar is having a deleterious impact in one market, gold, which has fallen 0.4% today and is now lower by nearly 10% from the highs seen in early August.  The driving forces of the rally remain in place, with real rates still under pressure and inflation still percolating, but it was a very overcrowded trade that seems to be getting unwound lately.
 
Finally, a look at the dollar vs. its G10 brethren shows that commodity currencies are the worst performers today with AUD and NZD both lower by -0.6%, while NOK (-0.5%) and CAD (-0.2%) complete the list.  However, at this hour, the entire bloc is softer vs. the dollar.  In the emerging markets, one needn’t be prescient to have guessed that MXN (-0.85%) and ZAR (-0.75%) are the leading decliners given the combination of their recent volatility and connection to commodity prices.  RUB (-0.6%) is also a leading decliner, suffering from the commodity market malaise, but frankly, APAC and CE4 currencies are also somewhat softer this morning.  This is all about USD strength though, not specific currency story weakness.
 
On the data front, yesterday’s Existing Home Sales were right on the button at 6.0M, as I mentioned, the highest reading since the middle of 2007.  Today the only thing to see is Markit’s US PMI data, expected to print at 53.5 for Manufacturing and 54.5 for Services.  Given the European readings, it will be quite interesting to see if the same pattern is evolving here.
 
Yesterday we also heard from Chairman Powell, but all he said was that the Fed has plenty of ammo and has done a great job, but things would be better if Congress passed another fiscal stimulus bill.  No surprises there.
 
This morning’s USD strength, while broad-based, is shallow.  Perhaps the biggest thing working in the dollar’s favor right now is the size of the short-USD positioning and the fact that recent price action is starting to warm up the technicians for a more sustained move higher.  I think that trend remains but believe we will need to see some real confirmational data to help it extend.
 
Good luck and stay safe
Adf