Equities and currencies posted a robust recovery during this past week. The Dow Jones Industrial Average rose more than 300 points, while USD sold off eased. The US government avoided shutdown after Congress passed a funding plan that would keep the government running until December 03, 2021. The October 18th debt ceiling deadline still looms but for now, investors celebrated good news. Drug producer Merck also said that in a clinical trial, their COVID-19 pill can reduce the risk of hospitalization or death by 50% when given shortly after infections. Any positive coronavirus treatment news is good for the market because it accelerates reopening plans and energizes the global recovery.
The US economy is already on solid footing as evidenced by stronger personal spending, the sharp rise in the ISM manufacturing index and upward revision to the University of Michigan Consumer Sentiment survey. According to ISM, “customer demand continues to swell as we prepare for the fourth quarter and overall growth has been extremely good for the year.” Unfortunately supply chain concerns are growing with policymakers such as Fed President Harker warning about a significant increase in inflation. The lack of price relief and prospect of taper should cap the rally in equities ahead of the November FOMC rate decision.
October is generally a challenging month for equities with some of the biggest market crashes happening this month, but the fourth quarter is typically a good one. It is statistically a positive month for the greenback as well with yields rising 11 out of the past 13 Octobers. This month is typically a very bearish month for EUR/USD, the second worst behind May. The commodity currencies also tend to under perform, particularly CAD. All of this is consistent with risk aversion and equity market weakness.