Sive Morten
Special Consultant to the FPA
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Fundamentals
News agencies are boiling with multiple "breaking news" and sensations around US elections. This topic so strong occupies people that some important events have passed unsigned, such as Fed meeting and NFP release. Turmoil around elections will be over sooner or later. Within recent 2-3 weeks we've mentioned all risks concerning this event and it seems that situation follows to our scenario that we call as a "worst". You do not need to be a prophet to suggest that if you have minimal gap between candidates and mailing-in ballots procedure - you can't avoid scandals and social unrest. We've spoken a lot about it and today do not intend to talk again, just provide minor updates on risk factors that we have. Our attention gradually turns to CV19 and lockdown situation as it will have long lasting effect on Global economy and EU, GB in particular. Despite the short-term euphoria and rally on elections' result, in medium-term perspective it could fade and another slowdown in economy stands around the corner.
Speaking on elections, the rising problems and attempt to contest results by Republicans makes recent upside rally very fragile and situation on the markets tricky because nobody knows how this will be over. Risk of reversal is not significant, but it is not eliminated totally yet. We should be realistic and understand that Republicans' attempts to contest results in State courts depend on those who control the particular State. Other words speaking, there is no perspective for contesting in "Democratic" States. But Trump is still the President and overall situation also depends on how far he is ready to go in attempt to contest the results. First precedents appeared already - Georgia re-counts, while a federal judge denied to stop ballot counting in Philadelphia. Here is the current situation in different States. State officials have said a full result will not be known until next week. The state allows mail-in ballots postmarked by Tuesday to be counted if they are received by Nov. 12.
Thus, let's hope that we escape big problems and this President's run will not push the country into the chaos. At least markets suggest that this should not happen - VIX index has dropped significantly on Friday, while US 10-year yields have risen and played back the half of recent collapse. Let's keep fingers crossed and hope that it'll work itself out somehow.
Another topic that was in a shadow of President's run, but that has direct relation to US Dollar value and FX market is a control over Senate and chances on "Blue wave" scenario. The U.S. dollar fell to two-week low against a basket of currencies and a seven-month low against the Japanese yen, as investors adjusted for the prospect that Republicans will maintain control of the U.S. senate, and stifle any plans for a large new stimulus package.
Democrat Joe Biden edged closer to victory in the U.S. presidential race as election officials tallied votes in the handful of states that will determine the outcome and protesters took to the streets. But the so called ‘blue wave’ where Democrats would also take control of the Senate in Congressional elections looked unlikely.
“I think the market’s assuming that Biden wins the White House but that the Senate is not going to be in the Democrats' hands, so you don’t have as big of a stimulus,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
U.S. Treasury yields dropped from four-month highs as a large jump in near-term supply to fund stimulus became less likely, reducing the appeal of the debt and weighing on the dollar.
“Typically a country with a large budget deficit, a large current account deficit, has to offer a large interest rate premium to suck in world savings, and because we can’t, because of the weak economy, the low inflation, I think that we can’t offer a sufficiently high interest rate premium,” said Chandler. “This is a broad dollar move.”
Stronger risk appetite as stock investors bet that Republicans would stifle any Democrat plans to raise taxes or tighten corporate regulations also helped to reduce demand for the greenback.
“The investor class loves the idea of a Democratic president and a Republican Senate that will return back to essentially a steady, normal state of affairs,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
The U.S. central bank on Thursday pledged again to do whatever it can in coming months to sustain a U.S. economic recovery.
It was “virtually unchanged from the previous meeting’s message,” said Lou Brien, a market strategist at DRW Trading in Chicago.
U.S. wholesale inventories were higher than initially estimated in September as sales barely rose, government data showed on Friday. The Commerce Department said wholesale inventories gained 0.4% in September, instead of dipping 0.1% as estimated last month. Stocks at wholesalers increased 0.5% in August. The component of wholesale inventories that goes into the calculation of gross domestic product rose 0.4% in September. Inventories were down 3.9% in September from a year earlier.
Gross domestic product rebounded at a historic 33.1% annualized growth rate in the third quarter. That followed a 31.4% rate of contraction in the second quarter, the deepest since the government started keeping records in 1947.
As a result, the dollar sank to its lowest level in over two months against a basket of peer currencies on Friday, as vote counting for the contentious U.S. elections
slowly moved toward a divided government and investors predicted more losses for the currency. Investors are betting that Democrat Joe Biden will become the next president but Republicans will retain control of the Senate, which will make it difficult for the Democrats to pass the larger coronavirus relief package they have been pushing.
The need for more stimulus was underlined on Friday when the U.S. government reported that employers hired the fewest workers in five months in October. It was the clearest evidence yet that the end of previous fiscal stimulus and exploding new coronavirus infections were sapping momentum from the economic recovery.
"We're still left with the view that the U.S. economy is decelerating, and that's playing out in a markedly weaker dollar," said Joe Manimbo, senior market analyst at Western Union Business Solutions.
A large decline in long-term Treasury yields due to expectations for less fiscal stimulus, combined with a rally in equities and other riskier assets, has placed the dollar under consistent selling pressure that is likely to continue.
"So far investors have been prepared to overlook the threat of a contested election, presumably seeing Donald Trump’s legal initiatives as 'frivolous' and these benign conditions have generated a broad-based dollar decline," said strategists at ING.
The recent currency moves have been big enough to set up a brief reversal. "We could see some end-of-week profit-taking catch up with the euro and the yen," Western Union Business Solutions' Manimbo said. "But it looks like there's the potential for dollar sentiment to continue to erode in the weeks ahead."
CV19 situation
We start discussion of CV19 topic from recent NFP data that has direct relation to perspective of economy. In fact we're not concerned with infection cases number per se, but on government measures and its impact on national economies.
Thus, the U.S. economy created the fewest jobs in five months in October and more Americans are working part time, underscoring the challenges the next president faces to keep the recovery from the pandemic on track as fiscal stimulus dries up and new COVID-19 cases explode across the country. The Labor Department’s closely watched employment report on Friday also showed 3.6 million people out of work for more than six months.
“Initially, the recovery was breathtaking, but has lost much steam,” said Sung Won Sohn, an economics professor at Loyola Marymount University in Los Angeles. “With no fiscal stimulus and the resurgence of coronavirus, job gains will be tougher to achieve in the future.”
Nonfarm payrolls increased by 638,000 jobs last month after rising by 672,000 in September. That was the smallest gain since the jobs recovery started in May and left employment 10.1 million below its peak in February. Though private payrolls increased 906,000 last month, the labor market recovery has a long way to go.
“Employment is still only at its late 2015 level,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “And at October’s pace, it would take about 16 months for employment to return to its pre-pandemic level.”
A contested election reduces the chances of another coronavirus rescue package from the government this year. Even if more fiscal stimulus is agreed on, it will likely be smaller than had been anticipated before the election. That shifts the spotlight to the Federal Reserve. The U.S. central bank kept interest rates near zero on Thursday. Fed Chair Jerome Powell acknowledged the pace of improvement in the economy and labor market had moderated, noting that the recovery would be stronger with more fiscal support.
“The Federal Reserve is going to end up doing more stimulus rather than scaling it back,” said James Knightley, chief international economist at ING in New York. “This is especially so if political tensions remain high and get in the way of a swift fiscal response.”
Lack of fiscal stimulus and spiraling new coronavirus infections put the economy on a sharply slower growth path heading into the fourth quarter. Restaurants and gyms have moved outdoors, but cooler weather and the resurgence in COVID-19 infections could leave many in trouble. Even if state and local governments do not impose new restrictions on businesses, consumers are likely to stay away, fearing exposure to the respiratory illness. The United States set a one-day record for new coronavirus cases on Wednesday with at least 102,591 infections, according to a Reuters tally.
The unemployment rate fell to 6.9% from 7.9% in September. But it continued to be biased down by people misclassifying themselves as being “employed but absent from work.” Without this recurring mistake, the government estimated the jobless rate would have been about 7.2% in October.
The number of people out of work for more than six months surged by 1.2 million in October. There were 6.7 million people working part time for economic reasons, reflecting reduced hours because of slack work or business conditions. That was up 383,000 from September. The share of permanently unemployed increased to 40.9% in October from 35.6% in the prior month.
“A rising share of temporary layoffs are becoming permanent, signaling the long-lasting scarring effects from the crisis,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics in New York.
Several European countries have implemented second lockdowns in response to a dramatic increase in COVID-19 cases. Over the past week Belgium, France, Germany and England have introduced national lockdowns. GDP data for Q3 are now available for close to one half of the global economy. The recovery through to September is looking to have been more rapid than Fathom had estimated in their central largely V-shaped scenario. With fresh lockdowns coming into force, it now seems inevitable that European economic growth will be weaker in Q4 than had been assumed. But how much weaker?
Evidence of the impact of a second national lockdown on case numbers is promising. Israel was first to impose national restrictions, entering a month of lockdown from 18 September. Ireland followed, beginning a six-week period of national lockdown on 21 October. The renewed lockdowns in these two countries have proved extremely effective in bringing down the number of identified cases of COVID-19
If the renewed lockdowns we are seeing across Europe are as successful as those seen elsewhere, then it is possible that four to six weeks of restrictions may be enough. In UK, If correct, the national lockdown will probably come to an end on 2 December as planned, though with some regions continuing to face more restrictions than others.
How will these renewed national lockdowns affect economic activity? There are grounds to believe they will have a smaller impact the second time around than in the spring. Firstly, in almost all cases the restrictions are less severe, with schools remaining open. Secondly, and perhaps more importantly, we have learnt more about the virus and are more prepared, which ought to mitigate the economic impact still further. On the demand side, we know more about the modes of transmission than we did in the spring, so people are likely to be less fearful about leaving the house to visit the businesses that remain open. And there is less uncertainty, with fiscal support measures tending to be in place before the lockdowns were enacted, and with a vaccine seemingly just around the corner. On the supply side, businesses have adapted, with those that are allowed to open having already made themselves COVID-secure. Many of those that are not, particularly in the hospitality sector, will already have established an online presence, offering delivery or takeaway options. Google mobility data for Israel and Ireland show that time spent in the workplace, a proxy for the impact on supply, fell by only one quarter to one half as much as in the first lockdown. Therefore, a cautious estimate would suggest that the second lockdowns will reduce activity by only half as much as in the spring.
In financial markets, increased nervousness on the part of investors is evident in the VIX measure of equity market volatility, which has risen sharply since mid-October. Nevertheless, this so-called ‘fear gauge’ remains substantially below levels seen in March.
COT Report
Despite strong rally across the board, markets stand cautious showing decreasing of total positions by dropping of open interest. EUR is not an exception in this trade. Besides, EUR shows decreasing of net long position despite strong upside action this week. It means that investors still care about political risks that could change overall situation on the markets:
Source: cftc.gov
Charting by Investing.com
So, let's take dry facts and create possible scenarios. Less probable but stormy scenario is D. Trump 2nd term. Currently markets treat this scenario as hardly likely and mostly like theoretical. In this case all rallies that we have now will be unwounded. First market reaction will be strongly down. The timing of this scenario is also extended as it relates to multiple legal cases which nobody knows when they will be finished. It means that Europe will end the lockdown at the moment when D. Trump will get the 2nd term and yet to meet all economy problems and pandemic. It means that after emotional sell-off, longer-term perspective of US dollar looks weaker.
Central and most probable scenario - Biden's victory, but "red" Senate. This is good decision for financial markets. Once results will be confirmed officially - profit taking could start. The only way, when rally continues if we get the "Blue wave", as it promises more stimulus. After first reaction, in the medium-term perspective, dollar probably will be under pressure by the same fundamental factors - while EU and GB finish lockdown in early December, US economy will be in "power transition" process with CV19 problems yet to be decided. More stimulus from US and Fed QE policy probably will prevent US yields from strong rally and this potentially will press on US Dollar as real interest rates keep falling.
Next week to watch
Election week was not kind to the dollar. It flirted with yearly lows following a closer-than-anticipated contest that scuppers plans for a spending splurge and ushers in more predictable trade policies. The world’s reserve currency might well catch a bid from safety-seekers if a protracted election crisis ends up in the courts. Further out, there are headwinds.
Inflation-adjusted ‘real’ yields on 10-year Treasuries are negative and that won’t change any time soon -- in September, analysts predicted nominal yields at 0.93% in 12 months, or about half the expected average inflation rate.
The question is whether negative real returns deter foreign buyers who own around 40% of U.S. government debt. Upcoming inflation data is expected to show consumer prices rose 0.2% in October for an annual 1.4% rate. Ten-year yields are currently below 0.8%.
Britain and the European Union have until Nov. 15 to try, yet again, to hammer out a Brexit trade deal. Such deadlines have come and gone before but this one matters because the transition period -- under which Britain has remained in the EU customs union and single market -- ends on Dec. 31.
Both sides say a deal can be done. But the EU’s chief negotiator has warned of “very serious divergences,” so trade disruptions may be just eight weeks away.
It is a reminder of the uncertainty the UK economy is facing; indeed, the Bank of England just delivered a larger-than-expected stimulus increase to limit the fallout from new coronavirus lockdowns and Brexit. As talks head into extra time, markets also get insight into the economic outlook -- UK Q3 GDP data comes on Thursday, alongside industrial production numbers.
In Germany we will get ZEW numbers on Tuesday that investors will watch closely as indicator of sentiment and economy conditions. Due to lockdown market expects indicator's drop to 40 points from 56 in previous month, indicating sentiment worsening.
Technicals
Monthly
Currently we have interesting situation when longer-term perspective of two scenarios mostly stands the same while nearest future could be different. In a longer-term perspective, as we've said EUR supposedly should get an advantage on a background of new US stimulus, low interest rates held by the Fed, wider US budget deficit, better EU CV 19 situation. It should let EUR to reach 1.28-1.30 level. And technical picture supports this scenario. BC action looks strong while retracement after COP is tight and small. Market is not at overbought and major resistance stands around 1.25 area that already has been tested once in 2017. OP target stands relatively close around 1.28.
Thus, if our central scenario starts to realize, especially in a case of "Blue wave", EUR could continue upward action immediately, forming reversal November month with nearest 1.25 target and completion of AB=CD pattern target.
Conversely, if "stormy scenario" will become a reality, it definitely takes more time (1-2 months), and markets start its pricing gradually, as any court cases demand time. Technically, it could take a shape of gradual downside drift. Once D. Trump victory becomes obvious - different pattern here could be formed that suggests deeper retracement initially. For instance, it could be butterfly "Sell". But longer-term consequences and final target stands intact, as major fundamentals remain the same.
Another chart that I would like to show is similarity between 2000 and current, potentially reversal situation. It is curious but in 2000 was previous "tricky" situation when G. Bush won the rally from A. Gore and a month-long series of legal battles led to the highly controversial 5–4 Supreme Court decision Bush v. Gore, which ended the recount.
Weekly
Weekly chart is the one that has drastic changing this week. Despite that trend stands bearish, we have bullish reversal week here, erasing of downside AB-CD pattern that makes us to consider upward continuation and challenge of previous top. Overbought level stands far enough and let market to do it.
At some part we could treat it as DRPO "Failure", although personally, I do not like the shape of the DRPO that actually doesn't have the 2nd top, although it has two closes below 3x3 DMA.
Market stands focus on "Central" scenario with possible upside continuation. It is needless to say that technical picture is based totally on existed fundamental background and it makes it absolutely useless for "stormy" scenario. We just follow with the existed trend...
Daily
Here we have bullish trend and market has formed bullish reversal swing this week (that actually is the same as reversal candle on weekly chart). Unfortunately we do not have near standing AB-CD extensions, downside AB-CD pattern has been erased... so we estimate upside target on lower time frames. Here, as market is after reversal swing and near overbought - we could get technical pullback. As it was mentioned above, votes calculation could last till the end of the week, so with lack of new information, market could calm down a bit and show retracement.
Intraday
Here is the same picture that we've discussed on Friday. Indeed price has broken up the pennant but has not reached totally the XOP target. EUR could try to do it in the beginning of the week. Here is the levels that market could reach on retracement. Potentially H&S pattern is possible, if EUR drops to 1.1720 support. Otherwise, if pullback will be small, not less than 1.18 K-support, it might be Double Bottom that we also have discussed. As retracement is not started yet - as usual, keep an eye on downside extensions, patterns that could better show possible destination point.
News agencies are boiling with multiple "breaking news" and sensations around US elections. This topic so strong occupies people that some important events have passed unsigned, such as Fed meeting and NFP release. Turmoil around elections will be over sooner or later. Within recent 2-3 weeks we've mentioned all risks concerning this event and it seems that situation follows to our scenario that we call as a "worst". You do not need to be a prophet to suggest that if you have minimal gap between candidates and mailing-in ballots procedure - you can't avoid scandals and social unrest. We've spoken a lot about it and today do not intend to talk again, just provide minor updates on risk factors that we have. Our attention gradually turns to CV19 and lockdown situation as it will have long lasting effect on Global economy and EU, GB in particular. Despite the short-term euphoria and rally on elections' result, in medium-term perspective it could fade and another slowdown in economy stands around the corner.
Speaking on elections, the rising problems and attempt to contest results by Republicans makes recent upside rally very fragile and situation on the markets tricky because nobody knows how this will be over. Risk of reversal is not significant, but it is not eliminated totally yet. We should be realistic and understand that Republicans' attempts to contest results in State courts depend on those who control the particular State. Other words speaking, there is no perspective for contesting in "Democratic" States. But Trump is still the President and overall situation also depends on how far he is ready to go in attempt to contest the results. First precedents appeared already - Georgia re-counts, while a federal judge denied to stop ballot counting in Philadelphia. Here is the current situation in different States. State officials have said a full result will not be known until next week. The state allows mail-in ballots postmarked by Tuesday to be counted if they are received by Nov. 12.
Thus, let's hope that we escape big problems and this President's run will not push the country into the chaos. At least markets suggest that this should not happen - VIX index has dropped significantly on Friday, while US 10-year yields have risen and played back the half of recent collapse. Let's keep fingers crossed and hope that it'll work itself out somehow.
Another topic that was in a shadow of President's run, but that has direct relation to US Dollar value and FX market is a control over Senate and chances on "Blue wave" scenario. The U.S. dollar fell to two-week low against a basket of currencies and a seven-month low against the Japanese yen, as investors adjusted for the prospect that Republicans will maintain control of the U.S. senate, and stifle any plans for a large new stimulus package.
Democrat Joe Biden edged closer to victory in the U.S. presidential race as election officials tallied votes in the handful of states that will determine the outcome and protesters took to the streets. But the so called ‘blue wave’ where Democrats would also take control of the Senate in Congressional elections looked unlikely.
“I think the market’s assuming that Biden wins the White House but that the Senate is not going to be in the Democrats' hands, so you don’t have as big of a stimulus,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
U.S. Treasury yields dropped from four-month highs as a large jump in near-term supply to fund stimulus became less likely, reducing the appeal of the debt and weighing on the dollar.
“Typically a country with a large budget deficit, a large current account deficit, has to offer a large interest rate premium to suck in world savings, and because we can’t, because of the weak economy, the low inflation, I think that we can’t offer a sufficiently high interest rate premium,” said Chandler. “This is a broad dollar move.”
Stronger risk appetite as stock investors bet that Republicans would stifle any Democrat plans to raise taxes or tighten corporate regulations also helped to reduce demand for the greenback.
“The investor class loves the idea of a Democratic president and a Republican Senate that will return back to essentially a steady, normal state of affairs,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
The U.S. central bank on Thursday pledged again to do whatever it can in coming months to sustain a U.S. economic recovery.
It was “virtually unchanged from the previous meeting’s message,” said Lou Brien, a market strategist at DRW Trading in Chicago.
U.S. wholesale inventories were higher than initially estimated in September as sales barely rose, government data showed on Friday. The Commerce Department said wholesale inventories gained 0.4% in September, instead of dipping 0.1% as estimated last month. Stocks at wholesalers increased 0.5% in August. The component of wholesale inventories that goes into the calculation of gross domestic product rose 0.4% in September. Inventories were down 3.9% in September from a year earlier.
Gross domestic product rebounded at a historic 33.1% annualized growth rate in the third quarter. That followed a 31.4% rate of contraction in the second quarter, the deepest since the government started keeping records in 1947.
As a result, the dollar sank to its lowest level in over two months against a basket of peer currencies on Friday, as vote counting for the contentious U.S. elections
slowly moved toward a divided government and investors predicted more losses for the currency. Investors are betting that Democrat Joe Biden will become the next president but Republicans will retain control of the Senate, which will make it difficult for the Democrats to pass the larger coronavirus relief package they have been pushing.
The need for more stimulus was underlined on Friday when the U.S. government reported that employers hired the fewest workers in five months in October. It was the clearest evidence yet that the end of previous fiscal stimulus and exploding new coronavirus infections were sapping momentum from the economic recovery.
"We're still left with the view that the U.S. economy is decelerating, and that's playing out in a markedly weaker dollar," said Joe Manimbo, senior market analyst at Western Union Business Solutions.
A large decline in long-term Treasury yields due to expectations for less fiscal stimulus, combined with a rally in equities and other riskier assets, has placed the dollar under consistent selling pressure that is likely to continue.
"So far investors have been prepared to overlook the threat of a contested election, presumably seeing Donald Trump’s legal initiatives as 'frivolous' and these benign conditions have generated a broad-based dollar decline," said strategists at ING.
The recent currency moves have been big enough to set up a brief reversal. "We could see some end-of-week profit-taking catch up with the euro and the yen," Western Union Business Solutions' Manimbo said. "But it looks like there's the potential for dollar sentiment to continue to erode in the weeks ahead."
CV19 situation
We start discussion of CV19 topic from recent NFP data that has direct relation to perspective of economy. In fact we're not concerned with infection cases number per se, but on government measures and its impact on national economies.
Thus, the U.S. economy created the fewest jobs in five months in October and more Americans are working part time, underscoring the challenges the next president faces to keep the recovery from the pandemic on track as fiscal stimulus dries up and new COVID-19 cases explode across the country. The Labor Department’s closely watched employment report on Friday also showed 3.6 million people out of work for more than six months.
“Initially, the recovery was breathtaking, but has lost much steam,” said Sung Won Sohn, an economics professor at Loyola Marymount University in Los Angeles. “With no fiscal stimulus and the resurgence of coronavirus, job gains will be tougher to achieve in the future.”
Nonfarm payrolls increased by 638,000 jobs last month after rising by 672,000 in September. That was the smallest gain since the jobs recovery started in May and left employment 10.1 million below its peak in February. Though private payrolls increased 906,000 last month, the labor market recovery has a long way to go.
“Employment is still only at its late 2015 level,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. “And at October’s pace, it would take about 16 months for employment to return to its pre-pandemic level.”
A contested election reduces the chances of another coronavirus rescue package from the government this year. Even if more fiscal stimulus is agreed on, it will likely be smaller than had been anticipated before the election. That shifts the spotlight to the Federal Reserve. The U.S. central bank kept interest rates near zero on Thursday. Fed Chair Jerome Powell acknowledged the pace of improvement in the economy and labor market had moderated, noting that the recovery would be stronger with more fiscal support.
“The Federal Reserve is going to end up doing more stimulus rather than scaling it back,” said James Knightley, chief international economist at ING in New York. “This is especially so if political tensions remain high and get in the way of a swift fiscal response.”
Lack of fiscal stimulus and spiraling new coronavirus infections put the economy on a sharply slower growth path heading into the fourth quarter. Restaurants and gyms have moved outdoors, but cooler weather and the resurgence in COVID-19 infections could leave many in trouble. Even if state and local governments do not impose new restrictions on businesses, consumers are likely to stay away, fearing exposure to the respiratory illness. The United States set a one-day record for new coronavirus cases on Wednesday with at least 102,591 infections, according to a Reuters tally.
The unemployment rate fell to 6.9% from 7.9% in September. But it continued to be biased down by people misclassifying themselves as being “employed but absent from work.” Without this recurring mistake, the government estimated the jobless rate would have been about 7.2% in October.
The number of people out of work for more than six months surged by 1.2 million in October. There were 6.7 million people working part time for economic reasons, reflecting reduced hours because of slack work or business conditions. That was up 383,000 from September. The share of permanently unemployed increased to 40.9% in October from 35.6% in the prior month.
“A rising share of temporary layoffs are becoming permanent, signaling the long-lasting scarring effects from the crisis,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics in New York.
Several European countries have implemented second lockdowns in response to a dramatic increase in COVID-19 cases. Over the past week Belgium, France, Germany and England have introduced national lockdowns. GDP data for Q3 are now available for close to one half of the global economy. The recovery through to September is looking to have been more rapid than Fathom had estimated in their central largely V-shaped scenario. With fresh lockdowns coming into force, it now seems inevitable that European economic growth will be weaker in Q4 than had been assumed. But how much weaker?
Evidence of the impact of a second national lockdown on case numbers is promising. Israel was first to impose national restrictions, entering a month of lockdown from 18 September. Ireland followed, beginning a six-week period of national lockdown on 21 October. The renewed lockdowns in these two countries have proved extremely effective in bringing down the number of identified cases of COVID-19
If the renewed lockdowns we are seeing across Europe are as successful as those seen elsewhere, then it is possible that four to six weeks of restrictions may be enough. In UK, If correct, the national lockdown will probably come to an end on 2 December as planned, though with some regions continuing to face more restrictions than others.
How will these renewed national lockdowns affect economic activity? There are grounds to believe they will have a smaller impact the second time around than in the spring. Firstly, in almost all cases the restrictions are less severe, with schools remaining open. Secondly, and perhaps more importantly, we have learnt more about the virus and are more prepared, which ought to mitigate the economic impact still further. On the demand side, we know more about the modes of transmission than we did in the spring, so people are likely to be less fearful about leaving the house to visit the businesses that remain open. And there is less uncertainty, with fiscal support measures tending to be in place before the lockdowns were enacted, and with a vaccine seemingly just around the corner. On the supply side, businesses have adapted, with those that are allowed to open having already made themselves COVID-secure. Many of those that are not, particularly in the hospitality sector, will already have established an online presence, offering delivery or takeaway options. Google mobility data for Israel and Ireland show that time spent in the workplace, a proxy for the impact on supply, fell by only one quarter to one half as much as in the first lockdown. Therefore, a cautious estimate would suggest that the second lockdowns will reduce activity by only half as much as in the spring.
In financial markets, increased nervousness on the part of investors is evident in the VIX measure of equity market volatility, which has risen sharply since mid-October. Nevertheless, this so-called ‘fear gauge’ remains substantially below levels seen in March.
COT Report
Despite strong rally across the board, markets stand cautious showing decreasing of total positions by dropping of open interest. EUR is not an exception in this trade. Besides, EUR shows decreasing of net long position despite strong upside action this week. It means that investors still care about political risks that could change overall situation on the markets:
Source: cftc.gov
Charting by Investing.com
So, let's take dry facts and create possible scenarios. Less probable but stormy scenario is D. Trump 2nd term. Currently markets treat this scenario as hardly likely and mostly like theoretical. In this case all rallies that we have now will be unwounded. First market reaction will be strongly down. The timing of this scenario is also extended as it relates to multiple legal cases which nobody knows when they will be finished. It means that Europe will end the lockdown at the moment when D. Trump will get the 2nd term and yet to meet all economy problems and pandemic. It means that after emotional sell-off, longer-term perspective of US dollar looks weaker.
Central and most probable scenario - Biden's victory, but "red" Senate. This is good decision for financial markets. Once results will be confirmed officially - profit taking could start. The only way, when rally continues if we get the "Blue wave", as it promises more stimulus. After first reaction, in the medium-term perspective, dollar probably will be under pressure by the same fundamental factors - while EU and GB finish lockdown in early December, US economy will be in "power transition" process with CV19 problems yet to be decided. More stimulus from US and Fed QE policy probably will prevent US yields from strong rally and this potentially will press on US Dollar as real interest rates keep falling.
Next week to watch
Election week was not kind to the dollar. It flirted with yearly lows following a closer-than-anticipated contest that scuppers plans for a spending splurge and ushers in more predictable trade policies. The world’s reserve currency might well catch a bid from safety-seekers if a protracted election crisis ends up in the courts. Further out, there are headwinds.
Inflation-adjusted ‘real’ yields on 10-year Treasuries are negative and that won’t change any time soon -- in September, analysts predicted nominal yields at 0.93% in 12 months, or about half the expected average inflation rate.
The question is whether negative real returns deter foreign buyers who own around 40% of U.S. government debt. Upcoming inflation data is expected to show consumer prices rose 0.2% in October for an annual 1.4% rate. Ten-year yields are currently below 0.8%.
Britain and the European Union have until Nov. 15 to try, yet again, to hammer out a Brexit trade deal. Such deadlines have come and gone before but this one matters because the transition period -- under which Britain has remained in the EU customs union and single market -- ends on Dec. 31.
Both sides say a deal can be done. But the EU’s chief negotiator has warned of “very serious divergences,” so trade disruptions may be just eight weeks away.
It is a reminder of the uncertainty the UK economy is facing; indeed, the Bank of England just delivered a larger-than-expected stimulus increase to limit the fallout from new coronavirus lockdowns and Brexit. As talks head into extra time, markets also get insight into the economic outlook -- UK Q3 GDP data comes on Thursday, alongside industrial production numbers.
In Germany we will get ZEW numbers on Tuesday that investors will watch closely as indicator of sentiment and economy conditions. Due to lockdown market expects indicator's drop to 40 points from 56 in previous month, indicating sentiment worsening.
Technicals
Monthly
Currently we have interesting situation when longer-term perspective of two scenarios mostly stands the same while nearest future could be different. In a longer-term perspective, as we've said EUR supposedly should get an advantage on a background of new US stimulus, low interest rates held by the Fed, wider US budget deficit, better EU CV 19 situation. It should let EUR to reach 1.28-1.30 level. And technical picture supports this scenario. BC action looks strong while retracement after COP is tight and small. Market is not at overbought and major resistance stands around 1.25 area that already has been tested once in 2017. OP target stands relatively close around 1.28.
Thus, if our central scenario starts to realize, especially in a case of "Blue wave", EUR could continue upward action immediately, forming reversal November month with nearest 1.25 target and completion of AB=CD pattern target.
Conversely, if "stormy scenario" will become a reality, it definitely takes more time (1-2 months), and markets start its pricing gradually, as any court cases demand time. Technically, it could take a shape of gradual downside drift. Once D. Trump victory becomes obvious - different pattern here could be formed that suggests deeper retracement initially. For instance, it could be butterfly "Sell". But longer-term consequences and final target stands intact, as major fundamentals remain the same.
Another chart that I would like to show is similarity between 2000 and current, potentially reversal situation. It is curious but in 2000 was previous "tricky" situation when G. Bush won the rally from A. Gore and a month-long series of legal battles led to the highly controversial 5–4 Supreme Court decision Bush v. Gore, which ended the recount.
Weekly
Weekly chart is the one that has drastic changing this week. Despite that trend stands bearish, we have bullish reversal week here, erasing of downside AB-CD pattern that makes us to consider upward continuation and challenge of previous top. Overbought level stands far enough and let market to do it.
At some part we could treat it as DRPO "Failure", although personally, I do not like the shape of the DRPO that actually doesn't have the 2nd top, although it has two closes below 3x3 DMA.
Market stands focus on "Central" scenario with possible upside continuation. It is needless to say that technical picture is based totally on existed fundamental background and it makes it absolutely useless for "stormy" scenario. We just follow with the existed trend...
Daily
Here we have bullish trend and market has formed bullish reversal swing this week (that actually is the same as reversal candle on weekly chart). Unfortunately we do not have near standing AB-CD extensions, downside AB-CD pattern has been erased... so we estimate upside target on lower time frames. Here, as market is after reversal swing and near overbought - we could get technical pullback. As it was mentioned above, votes calculation could last till the end of the week, so with lack of new information, market could calm down a bit and show retracement.
Intraday
Here is the same picture that we've discussed on Friday. Indeed price has broken up the pennant but has not reached totally the XOP target. EUR could try to do it in the beginning of the week. Here is the levels that market could reach on retracement. Potentially H&S pattern is possible, if EUR drops to 1.1720 support. Otherwise, if pullback will be small, not less than 1.18 K-support, it might be Double Bottom that we also have discussed. As retracement is not started yet - as usual, keep an eye on downside extensions, patterns that could better show possible destination point.
