The Morning Commentary: Action-Packed Week, Month and Year
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Action-Packed Week, Month and Year
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Andrew Kositkun Foreign Exchange Head Trader
Today kicks off one of the most eventful weeks of the year. Over the next five days, we will have the U.S. elections; central bank decisions from the Fed, the Bank of England (BOE), the Norges Bank and the Reserve Bank of Australia (RBA); and labor market numbers out of the U.S. and Canada.
Regarding the central banks, the RBA is expected to cut its policy rates and its three-year yield target. Conversely, the other central banks are expected to keep their policy rates unchanged; however, the BOE is likely to announce an increase to its asset purchase program.
Within these near-term events, the U.S. elections will be the headline story. Tomorrow’s election should affect the U.S. dollar (USD) in two ways. The first is through economic policies, especially fiscal stimulus and taxes, which the winner will follow. The second way is through the impact the election results will have on global sentiment. The nuances of these two factors create cross-currents for the USD, so the ultimate impact on the dollar remains contingent on the order and timing of how different events unfold.
Of course, there are several other factors that are also important to the markets for the rest of the year. These factors include COVID-19, the European Central Bank (ECB) and Brexit. Here’s where we are on these issues.
An argument could be made that focus on the U.S. election has kept the markets from fully reflecting the recent deterioration of COVID-19 trends. As soon as the elections are in the rearview mirror, COVID-19 trends should take center stage. Current market pricing implies a vaccine in the next couple of months. Clearly, a delay in this timeline would disappoint markets. Even if there is a vaccine, there will still be months to reach a critical mass of vaccinated people that allows life to return to normal. Under all vaccine scenarios, the upcoming winter presents a headwind.
The European Central Bank (ECB)
The ECB was dovish this past week and clearly signaled that it would take actions in December. This really isn’t a surprise, as the spike in COVID-19 numbers should lead to a substantial deterioration in economic activity. The question now is whether the Pandemic Emergency Purchase Programme will just be extended as expected or whether it will be linked to inflation.
Brexit uncertainty remains high, as the U.K.’s October deadline came and went without a deal. Despite this, both sides are still talking, and optimism remains for a deal. Market consensus remains for a skinny deal that leaves a lot out, including services. But a deal is far from a certainty, and talks will likely continue to the very end.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Nearly 100 million ballots have already been cast in the U.S. election. Broadly speaking, the betting market odds remain unchanged. According to the Real Clear Politics’ average poll spread, Biden’s lead stands at 7.2 points. This represents a pullback from a ~10-point lead in the middle of October but is still much wider than Clinton’s lead at the same point in 2016.
Oil prices remain under pressure due to supply and demand concerns. On the supply side, Libya’s output has risen more than expected. On the demand side, increased lockdowns in Europe and concerns for similar measures in the U.S. have weakened the economic outlook. It has also been reported that Russia is considering options to delay the tapering of OPEC+ cuts to the end of the first quarter.
Brexit progress is being reported, as recent headlines indicated the fishing dispute could be near a resolution. Ultimately, it is difficult to assess how material these reported breakthroughs are, but the expectation remains for some sort of skinny trade deal that avoids a hard Brexit.
Virus news continues to be negative, with COVID-19 deaths topping 1.2 million and global cases surpassing 46.5 million. The U.K. will enter a second lockdown this week, following much of Europe. In the U.S., there were more than 78,000 new infections.
China’s services PMI came in at 55.0, as the country continues its economic outperformance relative to the rest of the world.
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