By Deepta Bolaky
Investors are generally apprehensive of the month of September as on average it is marked as the worst month for the stock market. After a staggering rally in August driven by broad-based vaccine optimism, global stimulus, improving economic data, better-than-expected earnings season and the outperformance of the technology sector, global equities went on a wild ride which saw some major corrections across the stock market.
September has again lived up to its reputation of being the worst and scariest month for the stock market.
September kicked off with a sell-off in the tech sector which triggered a bloodbath on Wall Street. Geopolitical tensions, Brexit woes, US stimulus gridlock, the uncertainty about the economic recovery and fears of a second coronavirus outbreak have created an environment of caution. Risk sentiment was on and off causing wild swings between gains and losses in the stock market.
Major US equities indices plunged the most in almost 3 months. As of writing, the indices have retreated by more than 1.5% on three occasions already and Nasdaq Composite led the losses underpinned by a tech rout.
As of writing, the S&P500 is on track to record the worst month since 2018 against its global peers.
In a pandemic-induced environment, investors have relied heavily on fiscal and monetary policies from governments and central banks. The Federal Reserve has repeatedly emphasised on the importance of fiscal support given the limitations on the monetary side.
Ahead of the US election and amid a stimulus deadlock, investors struggled to push stocks higher. The US stocks have been lagging behind its peers in September.
European shares also struggled to edge higher as the Continent and the UK grapples with a resurgence of coronavirus cases heading into winter. New restrictions are being imposed to contain the virus which is threatening the recovery process. ECB’s President Christine Lagarde also reiterated the “incomplete, uncertain and uneven” recovery in economic activity.
Australian shares are seen trading within a range since the last few months. The strict lockdown measures in Victoria have dampened sentiment and the S&P/ASX200 index had struggled to rise as much as its market peers. However, as the month comes to an end, investors are eyeing the eradication of the coronavirus and the prospects of interstates travels and easing of lockdown measures.
Compared to other countries which are still battling the pandemic and where there are more talks of lockdowns or restrictions, the worst may be over for Australia. Investors will likely monitor reopening and the recovery process.
In the forex market, the month of September was a complete reversal of the price action seen in August. The US dollar gathered strength against nearly all the G10 currencies. Amid all the geopolitical tensions and an unparalleled health and economic crisis, investors sought safety with safe-haven currencies.
The focal point was the central banks’ next leg of action – major central bankers have joined the wagon for ultra-loose monetary policies for the next few years.
The New Dot Plot and the moderate inflation strategy adopted by the Fed has confirmed that borrowing costs will likely remain near zero through 2023 and quantitative easing will remain even longer. Ahead of the US elections, the political gridlock over the stimulus package has instilled fears that the US economy may not get the required support on time.
Since August, the XAUUSD pair has been trading within a range as investors digested some positive vaccines updates, improving economic data and easing lockdown restrictions. The indecisiveness of investors is reflected by the Doji candle on the monthly chart found at the top of the upside trend which suggested a sign of possible reversal of price direction.
While the US share market is currently being underpinned by those political risks, the US dollar found strength as a safe-haven as other central banks were also increasingly more dovish in their forecasts.
The BoE was among the few that has explored the prospects of negative interest rates quite early during the pandemic. In its recent meeting, the BoE further explores the effectiveness of negative policy rates triggering some selling in the GBP-related currencies pairs which were already dampened by Brexit woes. The UK economy remains fragile by hard-Brexit rhetoric and the recent rising number of cases in the UK which could result in more social distancing restrictions.
Aside from the commodity-related currencies, the shared currency has rallied against the US dollar since March lows lifted by the initial successful containment of the virus in Europe compared to the US. The unprecedented stimulus package and unity among the European countries during the pandemic provide further support to the Euro.
As fears of a second outbreak mounts in the European regions, the signs of divergence in the economic recovery in the eurozone area has tamed the rise in the shared currency. Simultaneously, the ECB’s comments about the appreciation of the Euro has caught much attention.
President Lagarde acknowledges that the appreciation of the euro is being monitored because it can exercise a negative pressure on prices but stated that they do not target the exchange rate. The incoming data in the euro area also show a strong rebound in activity broadly in line with previous expectations. However, it remains well-below pre-coronavirus levels.
Unlike the RBNZ which explored the possibility of negative interest rates, the RBA has remained reluctant to tap into negative interest rates given the lack of evidence on its effectiveness. Recently, the RBA has outlined the four options for further monetary actions if the RBA decides that it is warranted.
1st Option: Buy bonds further along the curve, supplementing the three-year yield target.
2nd Option: FX Intervention
3rd Option: Lower rates in the economy a little more without going into negative territory.
4th Option: Negative rates? The empirical evidence on negative rates is mixed.
Over the months, the Antipodean currency has rallied because of its higher interest rate over the US dollar and stronger iron ore prices. The calls for a rate cut and options like FX intervention or negative interest rates have pushed the Aussie dollar to the downside. The AUDUSD pair dropped from a high of 0.74 to a low of 0.70 during the month.
Source: GO MT4
The Yen gained strength as a safe haven but mostly following the announcement that Japanese Chief Cabinet Secretary Yoshihide Suga will replace Shinzo Abe as the new leader. In a pandemic-induced environment, Japan may have avoided a new period of political uncertainty for Japan as the new Prime Minister looks set to follow the steps and framework pushed by the former Prime Minister Shinzo Abe.
In such environment of doubt, the predominant uncertainty for the markets is when will the world recover from both crises which prompted investors to either hedge or seek safety from volatile investments with haven assets like the gold.
The XAUUSD pair has been on a tremendous rally since the pandemic rattled the markets and reached a high of $2,075 in the month of July. Since August, the XAUUSD pair has been trading within a range as investors digested some positive vaccines updates, improving economic data and easing lockdown restrictions.
A strengthening US dollar has put additional downward pressure on the precious metal despite the geopolitical and economic uncertainties. The gold plummeted below the key psychological level of $1,900. Even though gold may be poised for further downside dragged by the strengthening dollar, the precious metal remains at elevated levels.
Traders are to keep monitoring geopolitical headlines, central banks decisions, inflation levels, and leading economic data for fresh trading impetus.
Source: GO MT4
By Deepta Bolaky
Disclaimer: The articles are from GO Markets analysts, based on their independent analysis or personal experiences. Views or opinions or trading styles expressed are of their own; should not be taken as either representative of or shared by GO Markets. Advice (if any), are of a ‘general’ nature and not based on your personal objectives, financial situation or needs. You should therefore consider how appropriate the advice (if any) is to your objectives, financial situation and needs, before acting on the advice. If the advice relates to acquiring a particular financial product, you should obtain and consider the Product Disclosure Statement (PDS) and Financial Services Guide (FSG) for that product before making any decisions.
Previous: Jackson Hole Symposium: Markets Bracing for More Volatility
By Deepta Bolaky
After a standoff between the EU and Germany, following a critical ruling on ECB’s quantitative easing program by Germany’s constitutional court, the gradual reopening of economies of member states within the Eurozone has brought some optimism.
The downside risks for the Eurozone and its shared currency have somewhat eased on the fact that Europe, which was the epicentre of COVID-19 after China, might have gone through the worst phase of the pandemic. The sentiment for the Euro was also buoyed by the EU Recovery fund proposed by Chancellor Angela Merkel and President Emmanuel Macron to help Europe’s mostly hit countries.
Unfortunately, the optimism over the coronavirus fund proposal, which aims to show unity in overcoming the crisis and to achieve quicker economic recovery, was short-lived.
Amid an unprecedented crisis, the Franco-German proposal was to provide support and reinforce EU financial relations and show that Europe is standing together. Austria, Denmark, the Netherlands and Sweden, dumbed as the “frugal four” put forward a counter-proposal that highlights the diversion of opinions in helping the Southern members states.
The Franco-German proposal is about “overcoming the crisis united and emerging from it stronger”. Both leaders proposed to make outright grants to help countries in need. They want to launch a temporary fund of 500 billion euro for EU budget expenditure:
“This would not provide loans, but rather budget funding for the sectors and regions hit hardest by the crisis. We firmly believe that it is both justified and necessary to now provide funding for this from the European side that we will gradually deploy across several European budgets in the future.”
In contrast, the frugal four wishes to provide loans rather than grants to southern European countries and expect the recipients of loans to comply with the fundamental principles of the EU and commit to strong reforms in repaying the loans. Their two-year and “one-off” proposal appears to also outline how those countries should use the funds and target sectors that are mostly hit based on an assessment.
The coronavirus pandemic is testing the solidarity of European members and is threatening to reawaken a euro crisis. Southern countries like Greece, Italy and Spain lacked the fiscal space they need to put forward an economic stimulus package to support their economies, compared to Northern countries.
Both proposals are saying “yes” to emergency aids to assist with recovery, but the disparity lies on how the funds will be financed to respond to the economic wreckage. The size of the emergency fund, the conditions of the funds or whether it will be grants or loans will be a compromise the markets are expecting to see. However, the type of compromise might be a key factor in determining the relationships of EU members.
Unprecedented times probably need unprecedented Unity.
The fact that Europe may have gone through the worst phase of the coronavirus has somewhat eased the downside risks of the shared currency. But the current geopolitical tensions with China and uncertainties on the EU Recovery plan are putting a lid on the upside momentum of the Euro.
After the sharp plunge in March, the EURUSD pair has been trading within the 1.08 to 1.09 range. Yesterday, the better-than-expected IFO Surveys in Germany has helped the pair to hold ground and hover around the 1.09 level. The recovery plan could mitigate the selling pressure and allow a probable move above 1.10 level if there is a compromise that satisfies the frugal four.
Source: Bloomberg Terminal
The immediate attention turns to the European Commission which is supposed to unveil a draft recovery plan on May 27th, 2020.
By Deepta Bolaky
Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs. Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.
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