Election uncertainty, rising virus cases hit risk assets

A combination of election uncertainty and rising European virus case numbers has provided investors with
plenty of reason to avoid higher risk assets so far this week.

Stocks sold-off yesterday, as did risk currencies with less than three weeks to go until Americans go to the polls
in this year’s presidential election. While Democrat Joe Biden continues to hold a very comfortable lead in the
latest opinion surveys, the market is wary of trusting these local polls given how inaccurate they were at
predicting the outcome of the last election in 2016. Hopes of more US fiscal stimulus before the vote have also
continued to wane. House Speaker Nancy Pelosi has repeatedly called Trump’s plans as ‘grossly inadequate’,
while Treasury Secretary Steven Mnuchin has warned that getting any stimulus through Congress before the
election will be difficult.

A continued worsening in the virus situation in Europe has also caused traders to dump higher risk investments,
notably the euro that was back trading only just above the 1.17 level versus the dollar this morning. New cases
in France and Italy have risen to all-time highs in the past few days, with Germany registering over 6,000 cases
yesterday for the first time since early-April. While the situation is still nowhere near as bad as it was during the
peak of the crisis when mass tested wasn’t available, the fear is that without strict restrictions being
reintroduced case loads could quickly get out of control during the winter period.

French President Emmanuel Macron imposed a 21:00 to 06:00 curfew in nine French cities last night, including
the capital Paris. This will come into effect on saturday and last for at least four weeks. Closures of hospitality
venues have also been announced across parts of Spain, with Germany also announcing early closures of bars
and restaurants. As we mentioned yesterday, these harsh and potentially prolonged measures are certain to
weigh on growth of the European economy and present a significant downside risk to the euro, particularly
should it trigger the ECB to take more action at its December meeting.

Pound retraces gains on Brexit jitters, new UK restrictions

A notable exception to the sell-off in higher risk currencies on Wednesday was the pound, which jumped by
around one percent versus the US dollar amid optimism surrounding Brexit.

Today’s European Council meeting marks Boris Johnson’s self-imposed deadline for getting a full Brexit deal
done, although there is a universal acceptance that this will be pushed into the future. According to source, the
UK’s chief Brexit negotiator David Frost is expected to tell Johnson that enough progress has been made for
talks to continue. While this has fuelled hopes of a ‘bare bones’ trade agreement that avoids the ‘no deal’
scenario, the almost inevitability that talks go down to the wire is likely to keep investors jittery as the clock
ticks down to the end of the transition period at the end of the year.

With Brexit discussions likely to go to the eleventh hour, and with new restrictions being imposed by the UK
government on an almost daily basis, a short-term move lower in sterling could be on the cards, in our view.
We have already begun to see a retracement so far today, with the currency erasing half of Wednesday’s gains
at the time of writing.

2020-10-15T09:26:13+00:00 October 15th, 2020|