The mood is shifting in the financial markets. With a few days until the US Presidential election, investors are growing nervous. On Monday, Dow Jones Industrial Average fell more than 900 points intraday and typically when there is such an aggressive one day decline, further losses are likely. Panic selling will often lead to big multi-day moves in currencies and between record breaking coronavirus cases in the United States and Europe, dimming odds of a pre-election stimulus deal and US election uncertainty, investors have plenty to be worried about.
This is a big week in the markets. Not only will time run out completely if the White House can’t compromise with House Speaker Nancy Pelosi, but the second COVID-19 wave caught European nations completely unprepared and many are tightening restrictions to control their outbreaks.
Unfortunately, the localized piece-meal approach is not working and some nations could be forced to impose a nationwide lockdown and if one major country decides to do so, others could follow. Investors are watching France very closely as they reported 52,000 new virus cases on Sunday. This is now almost seven times more cases than their first wave peak in March.
EUR is holding on its position, but a return to a complete nationwide lockdown in some of the Eurozone’s biggest countries could be the tipping point for the currency. The European Central Bank’s monetary policy announcement is one of the most important event risks this week and with virus cases surging across the region, they’ll have no choice but to set the stage for easing before year end. USD selling seems the only reason EUR still enjoys demand, but even that may not keep the currency supported for long.
There are a number of factors that could affect how the USD and US markets trade this week. Aside from the upcoming election, third quarter GDP numbers are scheduled for release and it’s a busy earnings week. GDP growth is expected to snap back sharply in Q3 and if it does, there’s no doubt President Trump will try to point to this improvement as a reason for not encouraging more restrictions despite record breaking new virus cases and 40% surge in hospitalizations over the past month.
The federal government has basically given up with the White House Chief of Staff saying the administration is not going to control the virus – opting instead to focus its efforts on vaccines and treatments. Some states like Chicago and New Jersey have announced their own curfews and more could follow. Weak earnings could also accelerate the slide in stocks – some of the biggest tech names are reporting this week.
The Bank of Canada is not expected to change monetary policy this week but recent global developments and the ongoing closure of the US-Canada border should leave them cautious.