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Winter lockdowns and fears of a disputed result in the US Presidential election this week have initiated downward trends in financial markets this week.
UK prime minister Boris Johnson announced on Saturday that England will be joining Germany and France in re-entering a national lockdown, causing the pound to slide.
The race for the White House in the US is also a cause for uncertainty, with narrowing polls suggesting a narrower race than anticipated.
‘Safe haven’ demand for US dollars
During periods of global uncertainty, the US dollar usually increases in value due to its ‘safe haven’ status.
Having opened last week at around 92.8, the US dollar index (DXY) increased to 94.10 last week and opens this week on a high of 94.25 as equities and other currencies fall in value.
Sterling drops
After a positive period for the pound, the announcement on Saturday that England will be re-entering lockdown saw Sterling drop from US$1.309 last week to below $1.29 this morning.
Major European countries including France and Germany have also entered lockdowns, leading to less dramatic movement against the Euro. Sterling was valued €1.113 on Friday and has dipped slightly to €1.107 this morning (2 November).
Equities fall
Even before new lockdowns were announced in Europe, recent economic data suggested that the recoveries of the developed nations worst hit by the pandemic – including the UK – were slowing. This had already led to renewed fears of a double dip recession.
The subsequent effect of new lockdowns on equity markets has been significant, with the FTSE 100 opening this morning at its lowest levels since May and many other global benchmarks following suit.
Oil slips
The slumping value of oil is also an indicator of the impact of the pandemic's second wave.
The price for US WTI (West Texas Intermediate) crude slipped from around US$40 per barrel last Monday to around US$34.50 this morning.
Metals crumble
The strengthening value of the US dollar has undermined the value of precious metals with gold dropping from above US$1900 per ounce to as low as $1862 last week.
Silver initially followed a similar slide, dropping from the mid-US$24s to $22.7, but it has since recovered and opens this week around the $24 level.
Crypto spikes
Bitcoin continues to gather momentum following the boost of being allowed as a payment currency on PayPal.
It closed October at its second highest month-end level ever, briefly spiking as high as US$14,100.
Week ahead
Clear winner needed in White House race
The major focus for financial markets this week is the US Presidential election tomorrow (Tuesday 3 November) and the possible fall out from it.
Markets are hoping for a clear-cut victory one way or another, but with recent polls showing a closer contest than previously thought, fears are growing that a tight outcome could lead to a contested result.
Stimulus needed
Markets want a clear winner to be able to establish a fiscal stimulus package in the US which would in turn boost equity markets.
Joe Biden’s Democrat Party intend to put in place a larger package than Trump’s Republicans, so despite longer-term concerns over his less market-friendly policies, a Biden win could be more widely welcomed initially.
Rallying equities markets could, paradoxically, lead to a weaker US dollar as this would lessen the demand for ‘safe haven’ dollars.
Interest rates on hold
The Bank of England (BOE) interest rate announcement on Thursday is unlikely to lead to any significant change, but an increase in ‘quantitative easing’ (QE) is expected.
Decisions on interest rates by the Federal Reserve Board (FED) in the US are unlikely this week due to the proximity to the election.
Economic Data
Highlights this week include:
Today (2 November)
- Global Manufacturing PMIs
- Scheduled speech by the European Central Bank’s Mersch
Tuesday
- US Presidential election
- US factory orders report
- Speech from the Bundesbank’s Mauderer (Germany)
Wednesday
- Global Services and Composite PMIs
- ADP nonfarm employment change report in the US
- US crude oil inventories data release
Thursday
- German Factory Orders for September
- BOE and FED interest rate and QE announcements
- US weekly initial jobless claims data release
Friday
- German industrial production report
- US employment report