Stocks and FX majors extend sell off, but all hope is not lost for bulls

It was only a matter of time to be honest, as expectations over a pre-election US fiscal package fade and concerns rise over the economic impact of the second wave of the coronavirus sweeping across Europe and elsewhere. But does this mean there will now be more urgency by governments and central banks to provide more stimulus?

As investors wondered how the Eurozone economy will fare in Q4 after further tightening of lockdown measures in the region, European stock indices fell between 1.6 to 2.5 per cent this morning, while in FX risk-sensitive commodity dollars and European currencies sold off, which saw safe-haven flows into the US dollar and Japanese yen. Caught between a rock (falling stocks and yields) and a hard place (rising dollar), gold was unable to add to its gains from the day before. Crude oil sold off on lower demand concerns. US index futures were down by about 1 per cent.

As US investors enter the fray, the markets were still near their session lows at the time of writing.

Will they or will they not?

Until yesterday, there was still a glimmer of hope that a fiscal deal was on the cards before the presidential election. However, all hopes were seemingly dashed when Treasury Secretary Steven Mnuchin yesterday said that "getting something done" on stimulus before the election " would be difficult." But today, perhaps because index futures were sharply lower, Mnuchin has just come out and said that Donald Trump is determined to get a stimulus deal and that Trump will tell Pelosi he won't let testing stand in the way of a deal.

So, we are back to square one in so far as the stimulus is concerned. But will investors buy these latest remarks, and index futures?

Lockdown measures could hurt European economy

Earlier, it looked like investors had finally thrown in the towel after seeing hopes over new US stimulus fade away and as growth concerns mount after various restriction measures were introduced by many European countries in order to curb the rapidly rising coronavirus cases in this second wave of infections.

Coronavirus cases in Europe have surged over the past few weeks and yesterday both Germany and Italy reported record numbers of new infections. Restrictions have tightened across many major European cities, with the French government being the latest to introduce such measure for Paris where there is now 9 p.m. curfew. Here is the summary of the situation, courtesy of BBC:

Virus cases
How will authorities respond?

Although things could get ugly, it is worth remembering that central banks have repeatedly said that they are ready to intervene if necessary, by buying more government debt and other assets and lowering interest rates further. Such policy responses should not come as surprise given that growth this quarter will likely need to be revised lower in light of the new restrictions. Also, there may be more urgency by governments to respond by means of fiscal stimulus. So, there is a chance we could finally see some breakthrough in negotiations over the EU recovery fund and the US stimulus package over the coming days.  

Source: ThinkMarkets and