Pharmaceutical companies are making significant progress in the development of an effective vaccine, but depending on the market, it is not fast enough. If we are lucky, a vaccine will be approved before the end of this year, but it will not be widely available until 2021. In the meantime, new cases of the virus are increasing at an alarming rate around the world, causing panic among investors worried about a double-dip recession. Stocks were sold for the second day in a row, and 10-year Treasury yields fell by 8%. The U.S. dollar was sold against the euro (up to EUR/USD), Japanese yen, and Swiss franc. Europe is heading towards a contraction in the fourth quarter and the U.S. markets fear that America will follow suit.
It will only be a matter of days before new virus cases in the US exceed 200,000 per day. Although Moderna (NASDAQ: MRNA), which says it will release data in the next few days, shares good results, the ongoing outbreak could put a strain on the hospital system, making it difficult to provide ventilators and other treatments that limit mortality rates.
States have the difficult choice of allowing cases to multiply or controlling the virus with further restrictions. Many have opted for the latter, including Chicago, which has issued a 30-day notice of homestay and asked residents to cancel Thanksgiving rallies. Detroit canceled in-person classes and New York ordered restaurants, bars, and gyms closed at 10 p.m. and limited gatherings to 10 people. All of these measures are having a negative impact on the economy and, unfortunately, more severe restrictions are expected in other states.
For all these reasons, it is not surprising that risk aversion is returning. Consumer prices also stagnated in October instead of rising by 0.1% as economists had predicted. Federal Reserve Chairman Powell said Congress and the Fed will have to do more. Investors did not like the White House’s decision to withdraw from the stimulus talks and President Trump’s plans for an executive order that would prohibit Americans from buying or selling shares of certain Chinese companies. We expect risk aversion to persist with further losses to the USD/JPY and other high beta currencies.
Surprisingly, the Euro was one of the only currencies to outperform the U.S. dollar. Despite significantly lower German industrial production, the ongoing virus epidemic, and Chancellor Merkel’s warning that restrictions could be extended until December, the single currency held up remarkably well. Anti-dollar flows are the only explanation, as the outlook for the eurozone is bleak. On November 2, all entertainment establishments, restaurants, and bars were ordered to close, except for take-away, major events were canceled and work at home notice was published.
Hospitalizations in France are higher than the April peak, with one person being admitted to hospital every 30 seconds due to VIDOC. If this trend does not improve, they may have to take other measures, all of which will be disasters for the euro.
However, the worst-performing currency on Thursday was the pound sterling. This decline is not surprising considering that the United Kingdom is also in a locked-in situation, that the Brexit talks are going nowhere, and that the third-quarter GDP and industrial production figures were weaker than expected. One week after the start of the lockout, the number of new daily cases of the virus has reached a record level. It usually takes two to three weeks for the restrictions to have a significant impact on the number of cases. Next week we will have a better idea of the need for the UK government to take additional measures. All three major currencies also succumbed to the sale, with the Australian dollar being the main culprit in the trade tensions between China and Australia.