In our last note, we talked about all of the reasons why this October could be a spooky one for the markets. This morning’s curveball is an example of the surprises that could be in store this month. President Donald Trump and the First Lady tested positive for coronavirus, sending stocks sharply lower. The Dow Jones Industrial Average plunged 400 points at the open, driving currencies down with it. However, stocks recovered by the end of the day as investors shrugged off Trump’s positive coronavirus test. Now, it's just a waiting game to see if the Trumps’ symptoms are mild or severe. There have been a number of reports indicating that he is currently symptomatic with cold-like symptoms. Come Tuesday, if they remain relatively healthy, the rally in stocks should resume as this reaffirms Trump’s laissez-faire attitude towards the virus. Chances are he’ll also uses a swift recovery to energize his base. The big October surprise would be if he becomes extremely ill, which would complicate the upcoming election significantly.
The September nonfarm payrolls report was weaker than expected with only 661,000 jobs created last month, down from 1.371 million. Average hourly earnings growth slowed to 0.1% from 0.3%, but the unemployment rate dropped to 7.9% from 8.4%, a drastic improvement that exceeded the 8.2% estimate. This was clearly enough to satisfy FX traders as they did not sell the dollar after the jobs report. USD/JPY fell only a few pips before settling higher, while EUR/USD rallied briefly above 1.1730 before giving up those gains. The greenback ended the day higher against all of the major currencies except for sterling and the Japanese Yen. It says a lot that currencies were generally unaffected by what is typically one of the most important pieces of U.S. data. The only reason why this is happening is because there’s more people seeing the glass half full than empty. They see the constant dialogue between House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin as signs that a new coronavirus stimulus deal can be achieved. However, according to Pelosi, while an agreement can be reached, it may not happen until after the election. In the week ahead, nothing matters more to equity and currency traders than stimulus headlines and updates on the health of the Trumps.
The best performing currency on Friday was sterling. There have been many conflicting headlines on Brexit and that remains the case despite today’s rally. The UK’s Brexit negotiator thinks they have an outline to an agreement, but the EU’s negotiator Michel Barnier said serious divergences persists. So far, all of the positive headlines have come out of the UK as the EU has been more dubious of the progress being made. We are as well and don’t believe that a deal is in as close reach as the UK suggests. Between the rise in virus cases and the possibility of BoE easing later this year, it's hard to be a sterling bull.
The same is true for the euro, as Madrid returned to lockdown on Friday. Capacity for restaurants, gyms and shops are reduced by half with closes at 11 p.m. instead of 1 a.m. This is a big deal because Madrid is the economic center of Spain. New restrictions are also on their way for Paris after the city was placed on maximum COVID-19 alert level. This could include complete closure of bars and restaurants, which has already happened in Marseille and Aix. Details are expected this weekend. Regardless of which way you look at this, the outlook for the Eurozone economy is grim. If the second wave is not contained quickly, the recovery will slow dramatically. EUR/USD spent most of the week trading above 1.17 but is likely to move lower in the weeks ahead.
The Australian and New Zealand dollars finally snapped back after a multi-day rally, while the Canadian dollar remained unchanged. Australian retail sales fell slightly less than expected while New Zealand consumer confidence declined modestly. Despite today’s declines, we expect the AUD and NZD to continue to outperform as they ease rather than increase virus restrictions.