Daily Market Comment – Yen on the up, stocks slump as risks mount; dollar looks to flurry of Fed speakers


Raffi Boyadjian, XM Investment Research Desk
  • Worsening virus outlook casts shadow as US election risks, low prospect for fiscal stimulus add to worries
  • Yen outperforms but dollar subdued before Fed begins charm offensive
  • Stocks selloff accelerates after Wall Street falls for third straight week

Fresh lockdown fears dampen mood

An unrelenting rise in coronavirus cases globally is weighing on sentiment at the start of the trading week as investors increasingly question their rosy predictions about the recovery. Europe is at the centre of the latest resurgence, with many localities announcing toughened restrictions. While most governments seem intent to not go down the lockdown route, there is growing talk in some countries, such as the UK, of the possible need for another nationwide shutdown.

However, even if a second lockdown can be avoided, the growing number of regional curbs being imposed threaten to derail Europe’s recovery, which is already showing signs of faltering. Flash PMI numbers due later this week are being eagerly awaited to gauge how well business activity held up at the start of September.

The dimming outlook in Europe contrasts with a slightly more optimistic one in the United States, where the second virus wave that swept across the country in the summer appears to have only mildly set back the recovery. However, the US economy is far from being risk-free as, apart from the fact that daily virus cases remain too high, the diminishing odds for additional fiscal stimulus mean the recovery could soon run out of juice.

There had been some hope in the past week that the Republicans could be ready to accept a bigger virus relief package. However, following the death of Supreme Court Justice Ruth Bader Ginsburg, President Trump’s determination to nominate a replacement before the election could scupper any chance of a bi-partisan deal. As for the election itself, the uncertainty in the run up to the November 3 polling day is one more drag on the markets that could exacerbate any risk-off episode.

Yen soars, but dollar not far behind; Fed speakers eyed

All this may have knocked the wind out of the risk rally for good as equities look increasingly stuck in a sideways pattern, while the safe-haven yen powers ahead, extending its winning streak against other majors today.

Although the yen has political risks of its own at play amid speculation Japan’s newly appointed prime minister is considering calling an early general election, its main rival – the US dollar – has lost some of its shine after the Fed’s recent communication of lower rates for longer. This could be one factor pulling down dollar/yen, which hit a six-month low in thin Asian trading as Japanese markets are closed today and tomorrow.

But the yen has also been rising against other currencies as its yield disadvantage has vanished during the pandemic when other central banks slashed rates to zero. In fact, Japan now has one of the highest real interest rates among advanced economies and this could once again make it the preferred safe haven currency if market conditions deteriorate further.

That’s not to say that the dollar’s glory days are over as the greenback jumped against a basket of currencies at the start of European trading today as the mood soured further. Both the euro and the pound tumbled below key levels, though the risk-sensitive Australian dollar found some support from a stronger yuan.

A number of Fed officials will be taking to the virtual podium this week, with the main attention being on Chairman Powell, who will testify before Congress on Tuesday, Wednesday and Thursday. Powell will be explaining the Fed’s pandemic response to lawmakers and may signal whether additional stimulus is on the cards. He is also due to speak today (14:00 GMT) along with Governor Brainard and New York Fed President Williams.

Stock market rout deepens

Shares in Europe were hammered on Monday as growing jitters about the economic outlook as well as the political unease in the US unsettled markets. London, Frankfurt and Paris were down about 3%, while US stock futures implied losses of about 2% at the open.

The declines are adding to September’s sharp pullback, which has seen all three main indices on Wall Street fall for three straight weeks, raising the prospect that stocks are entering a bear market.