Global market watch - 26th October 2020
It seems as if there is a very specific dance that needs to take place before a trade deal is agreed between the UK and EU. Two steps forward and one back has happened more than once, and ultimately both sides need to be seen by their home audiences to be winners. With the resumption of trade talks last week, as the EU confirmed that it would compromise with the UK and that the latter was a sovereign nation, meant that we almost saw a pirouette! There are, of course, still issues to be resolved but both sides need a deal, so we would now suggest only a 35% chance of no-deal.
However, the probable deal itself has been criticised by professor of European Law, Michael Dougan, who said it ‘may as well be no deal at all’. A sign of its weakness is that they EU will be able to pass it into European law without even asking the 27 individual parliaments to ratify the treaty. There will still be many barriers to trade such as forms to complete and VAT changes. However, the market will probably only look at the headline idea that a trade treaty is agreed and will be bullish towards the pound until the deal is made, presumably by mid-November. Anyone for Friday 13th?
As we crawl towards the US election, the increase in the virus gets worse but is quietly ignored. We have the ECB meeting this week, and it wouldn’t surprise if President Lagarde prepare the market for more QE in December. This would be in response to the last two months deflationary price data and the virus returning. Another motivator for the euro this week will be the US. A narrowing of the polls will probably see EUR/USD slip, while on the other hand if there is good news on the stimulus package, then it could help EUR/USD move higher. German GDP released on Friday will be keenly watched to try and gauge the state of the EU economy. SNB Chairman Jordan speaks today with USD/CHF poised just above important technical support of 0.9000. There is now a probability that this level could be broken on the downside. If it occurs, it would suggest another leg lower of dollar weakness.
The polls have been remarkably steady, with President Trump still leading in two swing states and trailing in six. Iowa is very close with Trump’s lead being 0.1%. The TV debates haven’t changed the narrative and with the virus returning to the South the probabilities increase that President Trump will be a one-term president. However, the President is making a comeback in the energy states (Texas, Wyoming, Pennsylvania, Louisiana and West Virginia) and is certainly trying to woo the black vote as well, so the result is not a forgone conclusion. It does now appear that the much awaited and needed stimulus package will arrive after the US election.
The AUD has been a beneficiary of US dollar weakness, but its trajectory is not a clear one at the moment. The Australian stock market was weak last week and there are still concerns over the lockdown measures weighing upon the economy as well as the relationship with China and how that is going to progress. Some analysts suggest that the RBA will cut rates from 0.25% to 0.1% at its November 3rd meeting, although this would largely be seen as a symbolic gesture.