Preliminary PMIs, Covid and Brexit to shake the markets

With the US political scene slowly solidifying and the virus surging we enter the new week. Hopes for a Brexit deal are on the horizon, EU efforts for a fiscal stimulus deal intensify, while Australia’s relationships with China seem to remain tense. On the monetary front, central banks remain substantially dovish and a number of statements from monetary policy makers across the world could alter the market sentiment in the coming week. As for financial releases we highlight on Monday the release of the Markit preliminary PMIs which are expected to show the damage done to economic activity in various countries.

USD –Fiscal stimulus talks to resume?

In the US the political uncertainty seems to be reduced. Georgia’s recount has reaffirmed the win of Biden, weakening the case for Trump to dispute the result of the US elections, while Biden attacked the lack of cooperation of the Trump administration for the transition of the presidency. It should be noted that US administration and the Fed publicly collided over whether to extend the monetary programs of the Fed, creating extensive market worries yesterday. Also yesterday, news that the two major parties could restart negotiations for a fiscal stimulus tended to increase market hopes, weakening the USD. On the pandemic front, note that Pfizer plans to apply for emergency authorization as early as Friday, while analysts speculate that a vaccine could be released earlier than year’s end. In general, news about the vaccine seem to be getting better and better, raising hopes in the markets for a return to some kind of normality.

Yet the increased number of COVID 19 cases and intensified measures, tend to overshadow such news or reverse the euphoria created rather quickly weighing on morale and market sentiment. As for financial releases, we highlight on Monday the preliminary Markit PMIs for the US economy, as well as the Consumer confidence for November on Tuesday. On Wednesday we get the Durable goods orders for October, the GDP estimate for Q3 and the weekly initial jobless claims figure among a slew of US data. We highlight the Thanksgiving holiday on Thursday, as a possible risk factor for the resurgence of COVIDS 19 cases, as well as thin trading risks may arise.

GBP –Are we nearing a Brexit deal?

The pound seemed to be pushing higher against the USD and the EUR, yet remained rather stable against JPY since Monday. A Bloomberg article reported that Brexit negotiations zero in on a possible deal which could be feasible as soon as next week. Also local media reported that Britain’s chief Brexit negotiator, David Frost told UK’s PM Johnson to expect a Brussels trade deal “early next week”. We expect Brexit to continue to be a key issue for the pound’s direction, and any headlines confirming that the two sides are nearing a deal could support the pound and vice versa. On the other hand, we tend to maintain our worries for UK’s economic outlook given the disruptive nature of the meesures taken to curb the pandemic. We expect Rishi Sunak’s speech on Wednesday to announce a 1-year plan for government spending which could support the GBP.

On the monetary front, we highlight BoE Governor Bailey’s comments that quantitative easing at a time like this, can prevent an “unwarranted tightening in financial conditions” wich could pave the way for BoE to proceed with further asset purchases. As for financial releases, next week we note the preliminary PMIs for November on Monday, the CBI distributive trades indicator for November on Tuesday and the nationwide house prices for November on Friday.

ΕUR – PMIs to show the damage done in November

The common currency seems poised to end the week a bit higher against the greenback as these lines are written. On the monetary front, ECB president Christine Lagarde’s stated that news on the vaccine do not alter the outlook for the coming months and controlling the positivity in the markets. Lagarde yesterday pressed EU leaders for quick action on a possible fiscal stimulus for Europe. The ECB President stated that EU governments should make the pandemic relief stimulus available without delay and at the same time pledged for a forceful ECB stimulus program in the bank’s December meeting. It should be noted that the statements were made just hours before an EU summit were EU leaders are to discuss a fiscal stimulus of 1.8 trillion. Negotiations are to continue as some member countries seem to be blocking the release, with a possible compromise to be found in the December summit.

As for financial releases, we highlight the release of Eurozone’s preliminary PMIs for November on Monday. The readings for France, Germany and the Eurozone as a whole, are expected to drop across sectors, mirroring the adverse effects of the renewed lockdown measures on the levels of economic activity. Also, Germany’s Ifo readings on Tuesday for November could generate substantial interest as well as on Friday, France’s preliminary CPI (EU Norm.) for November and Eurozone’s Economic sentiment for November.

AUD – Market sentiment to move the commodity currency

The Aussie tended to maintain a sideways motion in the past week, as markets’ indecisiveness kept volatility at low levels for the commodity currency. Even the positive news for a COVID 19 vaccine tended to leave AUD traders unimpressed. Analysts tend to highlight that RBA’s increased asset purchases, may be capping any possible further gains for AUD. At the same time the strained relationships with China are not helping either, especially after China’s import ban for a number of Australian products as mentioned in last week’s report. It’s characteristic that RBA governor Lowe stressed the need for Australia to keep a strong trade relationship with China. Market sentiment is expected to be the key driver for the commodity currency in the coming week and should a risk on approach be preferred by the market, we could see the Aussie strengthening.

At home, South Australia entered a six day lockdown on Wednesday, intended to serve as a circuit breaker for the spreading of the disease, also weighing on the prospects of the Australian economy and the Aussie. As for financial releases, Aussie traders are to have an early start as Australia’s preliminary PMI’s for November are out in the Asian session on Monday, while on Thursday we get the capital expenditure growth rate for Q3.

General Comment

In the coming week we could see US fundamentals still playing a key role for the markets, given the gravity of the situation. Nevertheless, a number of peripheral issues are reaching a make or break point and could create substantial volatility for their respective currencies. The common currency could be affected by the pandemic’s course in Europe. Lets not forget that the prospects of Eurozone’s economy could also play a substantial role on EUR’s direction, adding to the special weight of the preliminary PMIs release on Monday. The pound on the other hand, seems to be driven by Brexit negotiations and any sign that a deal is within reach could support GBP substantially and vice versa. Also, the UK economic outlook is vital for GBP traders and Rishi Sunak’s speech could create substantial volatility, given his past two speeches, which tended to support the pound.
On a more generic level, any improvement of market sentiment due to vaccine news like Pfizer filing for emergency use, could lift market sentiment, benefiting riskier assets such as commodity currencies and causing safe haven outflows for the USD, possibly weakening also precious metals. On the flip side, a surge of COVID 19 cases could increase market insecurity and strengthen safe havens such as the JPY and the USD. Overall, we expect that the course of the pandemic, as well as the differing pace of the rebound of economies around the world could enhance exchange rate differentials in the global FX markets. Finally, we are moving into the week with a special event called Black Friday and the subsequent Cyber Monday. We expect volatility, especially for the US equity markets, to increase given that revenue of companies could get an additional boost. However, the effect could be evident also on the FX market as the alteration of the risk mood could also affect the greenback.

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