This week has been more about the “on again, off again” US stimulus hopes than it has been about what the US elections mean for markets. With the US elections less than a fortnight away, investors have not forgotten how US President Donald Trump came from behind the polls in the last couple of weeks before the election. While few expect President Trump to be re-elected, investors still worry about a contested outcome and a market sell-off. The polls will be closely watched after the final presidential debate between President Trump and Democratic candidate Joe Biden this morning. More importantly, the inverse relationship between the USD and US stock markets have weakened after the US 10Y treasury yield started its steady ascent from mid-October.
The outlook for the DXY and its largest component, the EUR, remains mixed. Speculators looking at charts have turned bullish on EUR again. Then again, they were bearish only a week ago. Sentiment appears to be pivoted around the 50-day moving average around 1.18. On the other hand, the relative strength of the EUR against the USD has weakened in the past couple of months, best reflected by its negative yield differential against the US. Today’s PMIs are expected to diverge again across both sides of the Atlantic. Consensus expects composite PMI in October to hold above 54.0 for a third month in America and to slip below 50.0 (contractionary territory) in the Eurozone. The services sector appears more resilient in the US and more vulnerable in the EU to the second round of coronavirus infections.
Divergences were also apparent on monetary policies. The Fed has been on hold after it adopted a new average inflation targeting framework. The Fed has taken the stance that a large fiscal stimulus was key to averting a slower and weaker US recovery. Conversely, the European Central Bank governing council meeting on 29 October is expected to pave the way for more monetary stimulus in December. The ECB has turned less optimistic on the Eurozone recovery despite expectations for advance GDP (out on 30 October) to rebound to +9.4% qoq sa in 3Q from -11.8% in 2Q. The outlook for the EU recovery, which also happens to be jobless, has been weighed not only by the coronavirus resurgence and new restrictions and lockdowns, but also by the threat of a no-deal Brexit.
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