Today is clearly more of a wait and see mood in the markets, as most of the participants in the investment community are pretending to broadly maintain the status quo after the civilized crowd of innumerable fund managers and private traders found it prudent to transform some part of their capital from stocks and commodity assets into "cash". Those ingenuous plans were mostly accomplished already in the first half of the week.
Some inertial and even accelerative scenarios about the alleged moving downwards of the global indexes are still possible ahead of the official Election Day in the United States and because of new restrictions set in France and Germany. That being said, it is unlikely that these events will greatly change the overall picture of uncertainly. The so-called "partial lockdowns" in France and Germany have highly recognisable signs of a quarantine-like shape and are rather painful for some small service and entertainment enterprises, but clearly non-fatal for the whole European economy as most of the citizens just continue to work.
Therefore, the current market outlook has been getting worse for a while, but it has not changed drastically on the average, at least for the middle-term. It could even have the chance to recover just within a few weeks after the appearance of ultimate certainty on who will be the U.S. President for the next four years. The pool of European shares opened sharply lower on Friday morning, but the major Euro Stoxx 50 as well as the French CAC40 and the German Xetra Dax indexes quickly recovered after initial losses and even gained a little bit in the next two trading hours before noon. A similar pattern was observed during the course of the Asian and European trading sessions for futures prices on the U.S. S&P500 broad market and Nasdaq high-tech indices.
Among the emerging market (EM) currencies, only the Turkish Lira has really collapsed this week, crushed by both the country's inner financial problems and politics, including Turkey’s involvement in several regional conflicts at the same time. After the Central Bank of Turkey decided on October 22 to keep the key interest rate unchanged at 10.25%, which came as a surprise to most analysts who expected a rate increase of at least 1.5%, the outflow of capital abroad increased sharply. USD/TRY has since soared from the level of 7.8 to 8.35 for now. Altogether, since the beginning of this year, the Turkish rate has been reduced by 375 bps from 12% in January, which is abnormal as all these figures are less than the regular inflation in the country.
However, other EM currencies made relatively small and just usual movements, and so it hardly makes sense to talk about a kind of mass conversion of EM money into protective U.S. Dollar-nominated bonds. Some pressure on the Aussie and Kiwi Dollars or on the Loonie took place, but the scale of the movements in AUD/USD, NZD/USD and USD/CAD is not extraordinary. Naturally, a decisive reversal of those movements back from the Greenback to rival currencies is unlikely until there is clarity about the U.S. presidency and about the global stock exchanges. But this conclusion doesn't mean that the partial escape of capital flows from these currencies is necessarily going to accelerate sharply today or in the coming days.
As for the single European currency, it was trading lower since the beginning of the week too, with EUR/USD prices having fallen down from about 1.1750 to dip around the 1.1650 area on Thursday evening after the European Central Bank (ECB) sent some direct signals at its meeting that the economic outlook had darkened notably. The ECB Chairwoman Christine Lagarde hinted that further easing may be on its way in December. However, if the ECB potentially agrees on the need to act soon, it's not clear why it didn't act right now. Maybe it's just a rhetoric, not plans, so EUR/USD took a moderately higher and very narrow range of between 1.1660 and 1.1695 on Friday, at least in the first half of the day.
There should be no delay in the implementation of the Next-Generation EU stimulus package, Madam Lagarde said, but that is all that was said about the decisions which were already made by country leaders before. She also talked much on recalibration of the asset purchasing programs, which meant "looking at all our instruments" as the ECB does not "assume it will be one instrument, we will look at them all". Lagarde added that "we acted for the first wave, we will act for the second wave", and that the Governing Council was unanimous to take action at the next meeting but "policy change was not discussed at this meeting". Perhaps it was just the lack of clear plans to expand the purchase of new assets that kept the Euro from a dive deeper at this time.
The moderate downward momentum for the Euro was still given by the ECB’s comments that November is expected to be "very negative" because of the pandemic risks, so that Q4 growth could be "on the downside". It is cooling the European sentiment even after Q3 gross domestic product (GDP) data already surprised the markets on the upside on Friday, with a very strong 12.7% recovery vs a weak Q2 data and only 4.3% decline of GDP on annual base if compared with Q3 2019 pan-European GDP readings. Containment measures weigh on activity, consumers are cautious, Madam Lagarde said. So, the data analysis "signals that recovery is losing momentum faster than expected". Such estimates may keep EUR/USD from trying to rise and may even prompt the Euro to test some lower levels against the background of U.S. elections uncertainty.
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