News that US President Donald Trump and First Lady Melanie Trump had tested positive for coronavirus caused a sharp risk-off response across the financial markets overnight. But as Europe opened, the losses were trimmed for indices although they remained well in the red. The US dollar remained lower against haven currencies but trimmed its gains against commodity dollars, leaving the Dollar Index flat ahead of the monthly jobs report.
Will Trump’s absence raise Biden’s chance of winning elections?
The concern for equity market bulls is that while Trump is in self isolation, he will lose at least 10 days of campaigning at a critical moment as elections loom large, with polls and betting odds already suggesting Joe Biden is leading the race. The markets evidently support the business-friendly President, otherwise we will not have seen much of a reaction. Regardless of that fact, Trump’s absence will simply add to the uncertainty in the runup to the elections next month. Markets don’t normally like uncertainty.
Lockdown fears hurt oil prices and travel stocks
Talking of uncertainty, coronavirus is providing plenty of that as cases continue to rise in big cities such as London and New York. Fears are growing that London might go in a lockdown if cases do not start dropping soon. Travel shares have come under renewed pressure as a result, while demand concerns have hit oil prices, and shares of energy producers.
NFP eyed
Investors’ focus will now start shifting to the economy again, with the monthly non-farm payrolls report due shortly. Mass job cuts continued in September with many companies downsizing in order to survive. Still, 900K net non-farm jobs are expected to have been added to the economy last month. You can read our full NFP preview
HERE.
How will the markets react?
Well, I think a small disappointment is unlikely to cause too much of a reaction, while a slightly positive number may actually be bad news for the dollar as it will likely keep risk assets supported.
However, a massive beat or disappointment is the key risk. In the case of a massive disappointment, risk sentiment will likely be hurt further, which could weigh heavily on the indices and support the safe-haven Japanese yen. In this case, while the dollar may actually find some haven flows against commodity dollars and other risk-sensitive currencies, the USD/JPY should drop. But in the event of a massive beat, the dollar should rally across the board, while stocks could find support too.
Dollar remains entrenched in downtrend
Regardless of the short-term volatility, the fact that the Fed remains super dovish should keep the dollar under pressure in the long-term outlook. In September, the dollar was supported by some improvement in US data and as the euro and pound declined as the epicentre of the virus moved to Western Europe again, denting recovery hopes there. Dovish speeches from several policymakers from the BoE and ECB, as well as growing Brexit concerns, weighed on the GBP/USD and EUR/USD. As these currency pairs fell, so the Dollar Index rose.
However, I am not sure the troubles for the dollar are over yet and the upcoming presidential election means the road ahead will be bumpy. The Fed remains uber dovish and with equity markets holding their own relatively well, the dollar may very well resume its bearish trend against some currencies. But a lot will depend on the evolvement of the coronavirus and the elections. It is very difficult to say which direction risk assets will be heading given these uncertainties. Overall, I do think the best days of the bull trend in the equity markets are over and we will see more side-ways action leading up to the elections, as investors will unlikely be in the mood to take on too much risk given the potential for the business-friendly Trump losing. This implies that the dollar may also be going side-ways. But overall, I am leaning more towards the bearish buck argument than bullish, despite the Dollar Index’s recovery last month.