Stocks closed sideways last Friday after a choppy session and following better outcomes in Europe and Asia. The British Pound remained under pressure all week and fell further against the EUR and US dollar on Friday amid ongoing concerns about the status of EU trade talks.
A dovish tone from European Central Bank (ECB) Chief Economist Philip Lane in a post-meeting blog, Lane argues there is “no room for complacency” with inflation “far below the aim” and “only partial progress in combatting the negative impact of the pandemic on projected inflation.”
His message reinforces the expectation that further easing from the ECB is likely. The problem is that the market knows Lane cares, but the question is: does the Governing Council and does Lagarde?
Investors face many uncertainties moving into the Northern Hemisphere Autumn, most notably on the US elections and the global pandemic path.
Unquestionably the virus story is the dominant macro event, especially for equities, and is more likely to be dominated by optimism surrounding a vaccine. Investors will be keeping their eyes on the vaccine prize.
US election coming into full view soon
In a year chock-full of colossal macro risks, the US presidential election on November 3 presents another challenge to the view.
The focus on all the other danger points has meant the election played a less meaningful role so far but, with the election just a few weeks away, something tells me it may soon move into the driver’s seat.
There are some tentative signs in both Europe and Asia of decoupling from US markets, which, in my view, is foretelling about the upcoming election risk.
As is often the case, Florida is turning into a critical state to watch to monitor the US elections. Joe Biden’s lead in the state has narrowed in recent days, and the Miami Herald on Sunday reports that Michael Bloomberg is planning to donate $100 million to help Biden win.
Polling averages compiled by FiveThirtyEight show Biden’s lead over President Donald Trump shrinking to 2.8 points on September 9 from a lead of 5.3pp on August 17. Florida isn’t Biden’s only path to a victory, but it could be Trump’s only path.
With election risk and the path to economic nirvana clouded by virus concerns and while optimism remains keen on a vaccine to cure, it’s bound to be another roller coaster ride this week; indeed, sentiment will remain frangible as investors look for a cause to get back on the saddle in their go-to comfort trades.
It’s a busy week on the central bank front where Wednesday’s FOMC meeting will take centre stage this week amidst a full data docket. The Policy Strategy at Jackson Hole codified the Fed’s shift to a flexible average inflation target and an emphasis on achieving “broad-based” labour market gains, opening the door to adjustments in forwarding guidance and asset purchases at the September meeting.
However, since that event, Fed communications suggest anything but the FOMC going full tilt, and they do not appear to feel any urgency in delivering meaningful changes to their monetary policy stance.
Still, that won’t dissuade investors from speculation as policy guidance does not appear to feel any urgency in providing significant changes to their monetary policy stance,
Eye on the FOMC this week
When you run the numbers on 2020 central bank stimulus, it’s a close enough race that it is probably pointless to extract any meaning for currency direction. This is especially true with rates already at zero and QE doing nothing for the real economy.
The 2020 EURUSD higher story is mostly about diminishing EU break up risk; the US dollar has lost its carry appeal, the global reflation story as gold roars driven by real rates and worries about the US dollar as a reserve currency.
In the meantime, as trader preposition for the FOMC meeting, the US dollar will remain subject to the eccentricities of risk appetite.
Gold slipping away?
Gold is slipping despite slightly lower yields, which is more likely a consolidation reaction function in the near term as focus shifts to the FOMC meeting.
But gold looks very pedestrian these days as the FOMC may not provide the market with enough news or new information to make a decisive move in either direction, as the Fed has already given out a lot of information to the market.
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp