27-Oct-2020

1) Dollar Gains As Concerns Over U.S. Stimulus Package Triggers Risk-Aversion
2) EUR/USD: Only A Dead Cat Bounce? Covid, Election Uncertainty And Data Push Lower
3) FTSE Set For Higher Open HSBC Revamp In Focus
4) AUD/USD Range Bound As Investors Delay Bets Until After Key Risk Events

1) Dollar Gains As Concerns Over U.S. Stimulus Package Triggers Risk-Aversion

The greenback gained against the majority of its peers on Monday as a surge in coronavirus cases across the globe together with a lack of progress in the U.S. stimulus package talks triggered risk-aversion. (Dow ended the day at 27,686 down by 651 points or 2.29%).

Reuters reported White House economic adviser Larry Kudlow said talks between the Trump administration and House Democrats over another wave of COVID-19 aid were set to continue on Monday as both sides struggled to find a compromise one week before the Nov. 3 election.   Kudlow, speaking to reporters at the White House, said U.S. Treasury Secretary Steven Mnuchin would be in touch with the heads of relevant congressional committee chairs, but that there were still several areas of disagreement.

Versus the Japanese yen, the dollar found renewed buying at 104.66 in Australia and gained to 104.97 in early European morning on USD’s broad-based strength. The pair continued to ratchet higher and rose to an intra-day high at 105.05 in New York morning on broad-based risk-aversion before retreating to 104.83 on profit-taking.

The single currency opened slightly lower in Australia and dropped to 1.1830 ahead of the European open on risk aversion. The pair then met renewed selling at 1.1847 in the early European morning and fell to an intra-day low at 1.1804 on USD’s broad-based strength before recovering to 1.1827 and then moved broadly sideways in subdued New York session.

The British pound went through a roller-coaster session. Despite dropping from 1.3064 in Australia to session lows at 1.2993 in European morning on USD’s broad-based strength. The pair then rallied to an intra-day high at 1.3075 in Europe on Brexit optimism as European Union chief negotiator Michel Barnier extended his stay in London to continue Brexit talks. However, cable pared its intra-day gains and retreated sharply to 1.2995 in New York morning on risk-aversion. The price then recovered to 1.3030 and then moved sideways.

In other news, Reuters reported there is very little time left to bridge significant gaps between Britain and the European Union’s positions on sticking points in talks about a post-Brexit trade deal, Prime Minister Boris Johnson’s spokesman said on Monday.    “There is also much work to be done if we’re going to bridge what are the significant gaps that remain between our positions in the most difficult areas and time is very short,” the spokesman said.

2) EUR/USD: Only A Dead Cat Bounce? Covid, Election Uncertainty And Data Push Lower

Clinging on by the fingernails – that seems to be the case for EUR/USD, which is clawing onto 1.18. However, it is not going anywhere fast. Monday’s market decline boosted the safe-haven dollar and the recovery is meager – a classic “dead cat bounce” pattern.

The lack of a meaningful pickup is due to the same reasons that pushed the pair lower – and have only worsened since. First and foremost, COVID-19 cases continue spreading rapidly across the old continent despite action taken by governments – and a massive shuttering is getting closer.

German Chancellor Angela Merkel told the nation that “difficult months are coming” and her government is reportedly preparing a “lockdown light.” France, which slapped long nighttime curfews in Paris and other cities, is contemplating expanding extending it, moving it closer to a full stop of the economy.

The European Central Bank convenes on Thursday amid the raging second wave and consequent measures. The consensus is for no imminent action from the ECB, but President Christine Lagarde and her colleagues may opt to hint at the action in December. An increase in bond-buying is one of the options on the table.

Infections and deaths are on the rise in the US as well, but the reaction in currencies is different – the safe-haven dollar benefits from concerns.

Another factor weighing on sentiment is Congress’ failure to approve a multi-trillion fiscal stimulus package ahead of the elections. Lawmakers have officially been sent home until after the vote, just after confirming Amy Coney Barret to the Supreme Court. The new conservative justice could prove critical in case the nation’s highest court is asked to intervene in case of a conflict in one state or more.

Uncertainty about the elections also adds to pressure. With one week to go, national and state polls continue showing a considerable lead for Democratic candidate Joe Biden over President Donald Trump. Investors currently prefer a “blue wave” scenario – in which Dems also win the Senate. In that case, the newly elected officials would pass provide massive fiscal relief. Markets seem to shrug off concerns about business-unfriendly policies down the road.

Doubts stem from Trump’s stunning victory in 2016, yet there are considerable differences, including higher margins, more robust polling, and also immense early voting. No fewer than 64 million Americans have cast their votes, nearly 47% of the total vote count in 2016. If the president provides an “October surprise” it could be too late o have an impact.

FiveThirtyEight’s model is pointing to an 87% chance that Biden wins the White House and around 70% for a full “blue wave.”  Additional opinion polls will likely be published during the day and could have an impact. The most critical states are Florida and Pennsylvania.

Two significant US data points await traders. Durable Goods Orders for September are set to show another advance. The data feeds into Thursday’s Gross Domestic Product statistics for the third quarter. However, the lapse of government support in late July may have weighed on investment.

The second figure to watch is the Conference Board’s Consumer Confidence gauge for October. Economists expect an increase, yet rising coronavirus cases and concerns about the elections may have pushed it lower.

Downbeat US data could trigger haven flows to the greenback.

Euro/dollar has broken below the uptrend support line that has been accompanying it since last week but is so far holding above the 50 Simple Moving Average on the four-hour chart, as well as the 100 and 200 SMAs.

Critical support awaits at 1.1785, which was a low point late last week. It is followed by 1.1760, the low point where the uptrend support line was formed, and then by 1.1720.

Resistance awaits at the daily high at 1.1835, followed by 1.1865 and 1.1880.

3) FTSE Set For Higher Open HSBC Revamp In Focus

Whilst stocks on Wall Street saw their worst session in a month, European bourses are pointing to a mildly stronger start. Upbeat Chinese data is managing to distract investors, at least for now, even as covid cases continue to surge across the US and Europe and in the absence of additional fiscal stimulus from the US.

Chinese factory profits rose for a fifth straight month in September and economic growth roared back to life in South Korea. Profits at Chinese industrial firms rose 10.1% year on year in September, down from the 19.1% growth recorded in August, but still, a solid reading as strong exports, pent-up demand and government stimulus keep the recovery in motion. All in all, data from Asia is improving which is helping to offset nervousness surrounding rising covid numbers in Europe and the US. China’s 14th Five Year Plan will be in focus.

Investors are unnerved by the surging number of covid cases which are dampening the economic recovery outlook. News on Monday that talks over a coronavirus relief package have slowed could keep the lid on gains, although House Speaker Nancy Pelosi remains upbeat that an agreement can still be made before the US elections. Given that talks have been deadlocked for months and that the elections are less than a week away this seems a rather ambitious expectation.

Banks will be in focus after HSBC reported a less than feared 35% decline in quarterly profits amid an easing in bad loan provisions and an improvement in the outlook for its main markets. HSBC also announced significant changes to its business, including moving away from net interest income as the main source of income towards a fee-based focused business, whilst also accelerating plans to reduce the bank’s size and slash costs. This marks a huge shift in strategy but one that makes absolute sense given the rock bottom interest rates that have dominated the banking scene for years and are look set to stay for the foreseeable future.

HSBC reported a pre-tax profit of $3.1 billion in Q3, above the $2.07 billion forecasts. HSBC also announced that it expected bad loan provisions for the year to be towards the lower end of guidance of $8 – $13 billion. The stock listed in Hong Kong trades +5%.

HSBC follows Barclays in reporting an improved picture for bad loan provisions. This bodes well for Lloyds and NatWest which are due to report later this week.

4) AUD/USD Range Bound As Investors Delay Bets Until After Key Risk Events

The Australian dollar tracked sideways through Monday struggling to break a 40-point range in what was a large risk-off start to the week. Investors refused to extend bets in either direction amid growing concern the COVID19 second wave will force an extended European lockdown, while US stimulus talks stalled, ensuring there will be no relief package until after next week’s election. Global equities fell with the S&P 500, Nasdaq, and Eurostoxx all giving up over 2% while the USD bounced off last week low as risk aversion forced investors toward haven assets. Having rebounded from lows at 0.7020 last week we expect the AUD will remain largely range-bound as we rocket towards next week’s key risk events. Tuesday’s RBA policy meeting and the US Presidential election are critical markers in governing direction into the end of the year. Markets have largely priced in a 15 basis point rate cut and QE program. Analysts anticipate the RBA will begin purchasing 5-10 year bonds amid a total package valued between $150 – $200 billion. Anything short of this mark leaves markets vulnerable to disappointment and could prompt some AUD upside, while a more robust program will prompt likely prompt a quick AUD correction and could test supports. Barring a collapse in market sentiment we expect the AUD to trade between 0.7020 and 0.7230 through the next week.

The US dollar bucked last week’s downtrend and advanced through trade on Monday, emboldened by a risk-off shift, and push toward safe-haven assets. Rising Covid19 infections across the US and Europe and failed US relief talks forced investors out of equities and growth currencies and into treasuries, the USD, CHF, and JPY. Record numbers of new infections in France, Russia, and the US have sent a shockwave through markets amid fears reinstated restrictions will bring the economic recovery to a grinding halt. While Oxford University and AstraZeneca, front runners in the race for a vaccine, reported promising immune responses in older patients, phase 3 trials are still weeks from completion with a vaccine unlikely to be ready before December. Attentions this week turn to Key US GDP data and an ECB policy update as markets attempt to understand the impact of sustained restrictions and official attempts to guide the global economy through the Pandemic. We expect the ECB will provide some further guidance on additional stimulus measures as it attempts to see Europe through this 2nd wave and lockdown. Watch currencies to maintain a relatively narrow bank as investors delay big bets until after next week’s Election.