Shares bounce, but currencies are wary

28 September, 2020

The markets on Monday morning are supported by hopes for fiscal support in the US and progress in Brexit negotiations. Interestingly, the markets have managed to put aside the fear of the risks of an economic slowdown amid a near-record number of infections at the end of last week.

Market dynamics once again shows us that investors will be too quick to focus only on the number of new daily infections. We can already see that record infections do not lead to record mortality rates, which are noticeably lower than they were in April.

What is even more important is that the reaction of the authorities is not as strong as it was in March and April. Clearly, officials have raised the bar for imposing economic restrictions and this is good for the markets as companies that are not directly affected by the coronavirus crisis do not suffer. We saw in previous weeks that the demand for protective assets had increased very moderately, along with a worsening of the epidemiological situation.

Perhaps this common misfortune has spurred politicians to be more accommodating, once again overcoming their political differences. At the end of last week, negotiations between Democrats and Republicans shifted from a deadlock: a possibility of a deal and discussions became more substantial.

In the short term, this was a turning point for the US indices and spread positive waves to other indices. Futures on the S&P 500 are now trading 3.3% above Thursday’s low. The Dow Jones 30 retreated 3% from local dips, while the Nasdaq100 retreated 5%.

At the same time, the currency market has not yet seen an equally sharp reversal in demand for yielding currencies. The dollar index just suspended its upward correction at the end of the day on Friday, remaining close to its highs of 2 months, but shied away from resuming decline.

In addition to the major currencies, the less popular ones are also experiencing specific growth difficulties. The Swiss franc falls for its seventh consecutive trading session. AUDUSD remains within reach of 0.7000, after collapsing from 0.7320 last week. The Chinese yuan continues to give up positions.

Thus, the currency market is still not optimistic, preferring to take a waiting position. In spring, when we saw this kind of divergence between currencies and stocks, the foreign exchange market was right. And this time it may be more appropriate to watch the debate of politicians and their reaction to rising infections. This may help avoid false optimism in a still tense epidemiological and political environment.


Source  
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