Erratic volatility is the best expression to describe recent behavior of the equity and currency markets have been experiencing in October 2020. This may not be unusual for October which is historically the most volatile month for stocks but the market’s ability to ignore major game changing developments is impressive.
Equity and currency traders are reacting to every conflicting headline from the White House and this trend is likely to continue until 3rd November 2020.
The only rational explanation for the recent movement in the Dow is that investors are looking past near term political jockeying to the stimulus package that will come eventually.
US President Trump seems ready to sign a standalone stimulus check bill in a show of strength after returning to work in the Oval office. Regardless of who wins the election, a major stimulus package is on its way and the only question is how many businesses will survive until then.
Equity traders think the House will approve stimulus checks without a broader agreement or that the US economy will avoid further economic pain without stimulus before the end of the year.
Meanwhile, dovish FOMC minutes kept USD from rallying against most of the major currencies. Yet the rise in Treasury yields suggests that the minutes didn’t really matter to investors.
By altering their inflation target and in turn their forward guidance, the central bank doubled down on their accommodative policy and made it very clear that interest rates will remain on hold for the next few years.
They are open to increasing monetary stimulus but that’s unlikely unless stocks crash because of a second US virus wave or sudden deterioration in President Trump’s health.
EUR rallied despite an unexpected drop in German industrial production. After the sharp rise in factory orders, economists were looking for a 1.5% increase in IP but instead, it fell 0.2%.
Nothing seems more important for GBP than Brexit negotiations, very little headway has been made and both sides remain too far apart. Most positive headlines have come out of Britain while most EU headlines are laced with skepticism.
While both sides stand to lose from a no Brexit deal, the EU has the upper hand and is growing tired of this political dance. An agreement is still possible and the latest rally in GBP is a sign that investors are optimistic.