INSIGHTS

Duncan Donald

Fri, Oct 2


U.S. President Trump and Wife Contracts Covid-19 as Markets Leapt to Safe Havens on Knee Jerk

Overnight news broke that US President Trump and wife had contracted Covid-19.  As markets leapt to safe havens on the knee jerk reaction to derailment or delay of the election, there was a broad moment of panic as stocks in the remaining open Asian markets and the futures market fell nearly 1% as algorithmic trading took hold, intensifying the speed of the downside move.

Whilst obviously the gravity of the dangers of this news must be considered, with Trump being of the age and physical health of those most gravely affected by the virus. There are of course conspiracy theories that this could be a play, to simply gain a sympathy vote or show that he is strong enough to overcome it. However, with him lagging in the polls and being way off target of campaign funding, the self-isolation will hamper his ability to both raise funds to market digitally or visit the all-important swing states throwing the probability of re-election form 47% to 36% and with bookmakers now refusing to take bets on a Biden victory.

Aside from the initial fall in the stock markets and migration back towards the Japanese Yen as the preferred safe haven from the US Dollar the markets have quickly settled. The reality is the unemotional markets seem to have already prepared and priced in accordingly a Biden victory, so whilst this was a surprising event, it was perhaps, not a game changer.

Of course, this situation cannot be dismissed as a non-story, and in the coming days as we get an update of the impact of infection on the Republican party and Trump's health.  For now, we can assume Trump will continue the campaign virtually. There is also the possibility that Biden could have been exposed to the President on Tuesday’s live head to head event. The event has been billed as a shambles, with continued bickering and interruption throughout, whilst we expected this from Trump, Biden surprisingly allowed himself to be dragged to Trump's level, perhaps to prove the level of fight that Trump had claimed was absent from the Presidential candidate.

Having started the week positively with all major US indices very much on the front foot with the S&P 500 pushing a key level at 3,400 and Nasdaq 11,600, there was news of a large player buying $180m of upside options in FAANG stocks just ours before the announcement from Trump. After the obvious knee jerk lower the markets seem to have flattened somewhat, and it does feel as if given no further detrimental announcements, what has become typical upside momentum could tempt a continuation of the buying, with the market seeming intent on fresh highs ahead of the election. Even the disappointing Non-Farm Payrolls number seemed to lack impact.

In the UK, it was certainly a volatile week for the currency with the GBP/USD rate incredibly volatile in a 2-cent range between 1.2800-1.3000 range for the most part of the week. Having now entered the final month to formalise Brexit divorce agreement and future trading terms. The volatility came under mixed messages from the EU as ministers and negotiators at times showed great optimism for reaching agreement and formalising a deal, but also made clear their intention to take legal proceedings against the UK should they breach the withdrawal agreement. From the UK’s side we are continually hearing that PM Johnson is prepared to walk away, the Bank of England is ready to go negative on rates to thwart the impacts of no deal, as what appears a bluff of hard line action.

But with the UK’s countdown for agreement set for mid-October 2-weeks ahead of the EU’s deadline the reality is that talks and threats need to turn into actions. Whilst we have become used to important meetings and talks between the UK/EU were getting to the critical stages, and tomorrow's meeting of Johnson and the EU’s Von Der Leyen should not be underestimated in importance, which could impact the price action on Mondays open.

In terms of Covid impact there is still a heightening intensity of cases in Western Europe, the UK and the US with restrictions increasing and infections and hospitalisations rising. The UK PM elected not to enforce a full lockdown rule but encouraged working from home and discouraged mixing of households and late-night drinking and entertaining. After a week of increased infections, it was noted that in the last 24 hours we have seen a flattening of infection, but a continuation will need to be seen before the PM’s measures can be granted as preventative and successful, with him coming under heavy criticism after a briefing where he clearly showed he doesn’t understand his own rules.


The Week Ahead

 

  • Monday

With no notable data in Asia, it is a busy day of Eurozone data with Spain, France Germany, Uk and broader Eurozone PMI numbers. There are Eurogroup meetings scheduled all day. In the US we get Non- Manufacturing ISM PMI.

 

  • Tuesday

First up comes the Interest Rate Setting meeting from the Reserve Bank of Australia, with their statement ro follow as well as Annual Budget later in the morning. In the European session we get UK Construction PMI and a scheduled speech from Christine Lagarde of the ECB. Mid afternoon we hear from Lagarde again before Jerome Powell of the Fed Reserve and laterly Fed member Kaplan.

 

  • Wednesday

The first data of the day is German Industrial Production and French Trade Balance before Italian Retail Sales. We again hear from Christine Lagarde of the ECB. In the evening we get the minutes of the latest Fed Reserve meeting with Williams and Kashkari speaking either side of it.

 

  • Thursday

German trade balance comes first before we hear from Andrew Bailey of the Bank of England. In the US session we get weekly Unemployment Claims and Bank of Canada Macklem speaks.

 

  • Friday

The day begins with the Reserve Bank of Australia's stability review. From the UK we have a raft of significant data with Construction, GDP, Trade Balance and Industrial & Manufacturing Production. French and Italian Industrial Production. In the US session the main data is Canadian Unemployment and Employment numbers.


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