Stocks slide on rising virus cases, US election uncertainty

Panic set in among financial markets yesterday, with equity markets falling sharply with around a week to go
until this year’s US presidential election.

Investors have been relatively calm leading up to the vote, although stocks markets finally buckled under the
pressure on Monday, with the S&P 500 index down over two-and-a-half percent. While Democrat Joe Biden
remains comfortably ahead in the latest poll of polls, there remain lingering concerns that history could repeat
itself from four years ago, where the polls were proven to be well wide of the mark. Biden’s lead has also
begun to show signs of narrowing modestly from 10 points to around 8, with a handful of swing states,
including arguably the key battleground Florida, now showing a near dead heat.

That being said, the reaction in foreign exchange markets has been much less dramatic. The major currency
pairs spent almost all of yesterday trading within a relatively narrow range – even the higher risk ones held their
own against the US dollar. We have seen a modest move lower in the euro, although investors continue to
largely overlook the worsening pandemic situation in the European continent. Case loads are continuing to
jump aggressively, with the localised lockdown strategies failing to halt the growing rate of infection in many
countries. We see it as likely that the threat of additional, stricter measures could finally begin to trigger a more
sustained bout of weakness in the common currency in the coming days, should such measures be
forthcoming.

As for sterling, the pound ended London trading yesterday roughly where it began it. The market is not getting
too carried away by the prospect of an imminent Brexit deal being struck, despite growing optimism
surrounding discussions. EU chief negotiator Barnier is in London this week, with talks to shift to Brussels from
Wednesday as the two parties look to hash out an agreement. Any headlines regarding the progress or lack
thereof towards a deal would likely be a catalyst for some volatility in the pound this week.

How could this week’s ECB meeting impact the euro?

An added risk factor for this week is Thursday’s European Central Bank meeting. While no change in policy is
expected, we think that the Governing Council could use this week’s meeting as an opportunity to set up
additional stimulus down the road, namely at the December meeting.

Since the most recent ECB meeting, virus case numbers in the Euro Area have surged higher, with European
governments introducing strict containment measures designed to halt its spread. At the very least, the bank
will likely stress that the second wave of the virus presents a significant downside risk to the outlook and that
policy will need to remain accommodative in order to combat such a risk. Any indication that the bank is
eyeing up an increase in its PEPP stimulus programme in December would likely drive the euro lower, while a
non-committal, wait-and-see stance could support the currency.

2020-10-27T09:56:53+00:00 October 27th, 2020|