Intensifying Pandemic and Coming U.S. Election Rattle Investor Confidence

October 28, 2020

The world has experienced another very bad 24 hours with the coronavirus. Globally reported cases have risen by almost a half million people, and and the United States suffered over a 1000 more Covid-related deaths. For America, the first wave of the epidemic never really ended, whereas Europe is clearly into a second wave, and governments there are being compelled to reimpose business lockdowns that will hurt growth. European stocks plunged already as a consequence by at least 3.0% in Germany, France, and Italy as well as around 2% in Spain and Switzerland.

In currency trading, the dollar was lifted by hot-money, safety-seeking capital inflows and rose especially against commodity-sensitive currencies. The greenback advanced 1.4% overnight against the peso, 1.3% versus the Australian dollar, 0.8% vis-a-vis the kiwi and sterling, 0.7% relative to the loonie and euro, and 0.4% against the Swiss franc. The yen out-performed the dollar by 0.1%, however, and touched a 5-week high of 104.11.

The dollar is behaving like the refuge-seeking currency that it’s been for decades even though worries won’t quit that America may be headed for a post-election constitutional crisis. Opinion polls suggest that Joe Biden will secure a big popular vote victory that ought to exceed the threshold needed to translate into a comfortable electoral vote win as well. But due to a huge mail-in ballot upsurge, the race could be very close election eve and would be therefore vulnerable to legal challenges. With a 6-3 conservative bias in the Supreme Court, Donald Trump gains a strategic advantage if the election is decided by litigation rather than the votes.

U.S. stock futures point to another down day, but selling pressure did not commence immediately overnight. Share prices in Asia rose 0.6% in South Korea, 0.5% in China, and 0.1% in Australia and New Zealand while only closing 0.3% lower in Japan.

The overnight action in ten-year sovereign debt yields (down 0.1% or 0.2% in the U.S., Germany, Great Britain and Japan) and commodity prices (down 4.5% for WTI oil and 1.0% for gold) were also dominated by risk aversion rather than reaction to released economic data.

According to President Trump, a fiscal stimulus will not be reached until sometime after the election.

Reported indications of economic sentiment were mixed today.

  • Swiss economic sentiment according to the CS measure plunged to a 7-month low of +2.3 in October from 26.2 in September and readings above 40.0 in June, July and August.
  • Swedish consumer confidence and business sentiment improved to 8-month highs in October.
  • South Korean consumer sentiment, which had dropped to 79.4 in September from 88.2 in August, boomeranged to an 8-month high of 91.6 in October.
  • Turkish economic sentiment also improved in October to its best level since February.
  • But French consumer confidence slipped back to a reading of 94 this month (same as in July and August) after touching 95 in September.

Austria’s manufacturing purchasing managers index increased 2.3 points to a 23-month high of 54.0 in October, signaling a faster positive growth rate in the factory sector.

Norway, Sweden, and Spain published retail sales data for September. Norwegian sales rose 0.3% on month and 8.7% (a 2-month high) in year-on-year terms. Swedish retail sales climbed 0.8% on month, most since June, and 3.9% on year (a 7-month high). In contrast, Spanish retail sales recorded their first monthly drop since April, which resulted in a 3.3% year-on-year decline after -2.9% on such a basis in August.

Australian consumer prices had fallen 1.9% quarter-on-quarter in 2Q but recovered 1.6% in the third quarter. That was still only 0.7% higher than a year earlier and associated with a core rate of inflation of 1.2-1.3%.

South African CPI inflation settled back 0.1 percentage point in September to a 3-month low of 3.0%. Prior to the pandemic, inflation had exceeded 4.0% each month of the first quarter.

Italian producer prices ticked 0.1% higher on month in September, but the 3.1% drop from a year earlier constituted the fourteenth straight month that PPI inflation was negative.

Malaysian producer prices in September dropped 0.5% on month and 3.9% on year, its seventh straight negative reading in a row.

German import prices increased 0.3% on month but were 4.3% lower in September than a year earlier. Even when excluding energy, import prices recorded a 1.9% year-on-year drop.

Industrial production in Thailand posted a negative 12-month change in September for a seventeenth straight time, but the drop of 2.75% was the least in that streak.

The early bird estimate of the U.S. merchandise trade deficit shows a 4.5% contraction in September from August’s level.

On the central banking front, the National Bank of Georgia left its 7-day refinancing rate unchanged at 8.0%. Three cuts earlier this year had lopped a full percentage point off the policy rate, and a released statement of explanation notes that CPI inflation last month of 3.8% was as officials had expected. Officials expect inflation to converge on and hover around the 3% target during 2021.

The Bank of Canada Board will shortly reveal its latest interest rate decision and release their quarterly Monetary Policy Report. The key interest rate has been at 0.25% since a trio of cuts in March and is not expected to be changed at this meeting.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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