Some of the anxiety in global equity markets over the past 24 hours can be attributed to European governments’ reaction (mainly the UK) following a rise in new daily Covid-19 cases, according to Stephen Innes, Chief Global Market Strategist at AxiCorp.
European Center for Disease Prevention and Control data shows that over half of all EU countries experience increased flu incidents. In the UK, chief scientific advisor Patrick Vallance said that the new caseloads were doubling roughly every seven days.
It’s the political context
Worries about more stringent social-mobility restrictions turn to focus on the UK. The political context is just about everything when it comes to risk.
A government that came under heavy criticism for not acting quickly enough during the first wave is more likely to work on worst-case scenario outcome than waiting for more evidence to fall in their lap.
Although measures floated in the UK press (pubs closing at 2200 BST in England from Thursday) fall massively short of a circuit-breaker-type lockdown, the government’s increasingly risk-averse reaction function points to more significant restrictions in rolling format through autumn/winter.
That means more considerable downside risks to the economy and the British Pound.
In G10, GBP risks selling off. The threat of negative rates is the bearish eye candy that FX traders love to feed on, especially for countries running deficits as negative rates are not appealing to investors where the UK coffers need the money.
The US dollar sell-off may have legs if stocks continue to sell lower
Two factors explain much of the US dollar risk aversion appeal. Banking shares are sharply lower following the International Consortium of Investigative Journalists report examining bank behaviour in the context of Suspicious Activity Reports.
Travel and leisure stocks are weaker in Europe on the back of continued angst around the rising COVID-19 case count in the Eurozone and the UK.
The fickle nature of currency trading these days suggests that if US stocks fall, the USD rises, reflecting the USD’s dominance in demand when big down moves in risk sentiment occur.
US Fed Chair Powell Speech
There are no major surprises in the prepared text of Fed Chair Powell’s testimony to the House Financial Services Committee later today. There’s the recognition that, “Many economic indicators snow marked improvement,” but a concern that, “Both employment and overall economic activity remain well below their pre-pandemic levels, and the path ahead continues to be uncertain.”
However, the bipartisan debate around the White House’s upcoming Supreme Court nominee following the death of Justice Ruth Bader Ginsburg leaves a new round of fiscal stimulus looking less likely.
President Trump is expected to announce his nominee for the Supreme Court on Friday or Saturday, ahead of the first presidential debate on Sept. 29.
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