On the global financial markets, the week began with a continued decline in demand for risky assets, which caused a simultaneously increased interest of investors in defensive assets – government bonds of economically strong countries and safe-haven currencies, such as Japanese Yen and the US dollar.
What are the reasons for such current market conditions?
Commodity prices have risen after the global stock markets jumped up in the summer on a wave of decreasing pressure from the Coronavirus pandemic and hopes for an early invention of a vaccine against COVID-19. In the foreign exchange market, the US dollar reached a local bottom against a basket of major currencies. The autumn trade started with an increase in tensions, first in the trade and political relations between Washington and Beijing, or rather from the first signals that China’s economic recovery and the United States slow down. The release data of production indicators in the US and then in Europe, failures in creating vaccines against COVID-19 and the threat of a second wave of the pandemic finally convinced investors that a rapid global economic recovery would not happen.
Expectations of a V-shaped recovery did not materialize. And the reality of U – shaped or even W-shaped has grown significantly. The stock markets’ correction did not stop and grew into a wider decline, which may cause a more significant decline in asset prices soon. Against this background, the Fed made the situation even worse.
Following the September’s meeting, the American regulator, while maintaining all the parameters of monetary policy, released an updated economic forecast for the next few years. It turned out to be more optimistic than the June’s one and served as the reason for strengthening the decline in American stock indices, which dragged all other world indices down with them.
If earlier investors expected that the Fed would indeed be forced to keep interest rates at extremely low levels for all the coming years, the positive outlook had an opposite effect. It caused an increase in fears that an intensive rise of inflation against the background of its targeting will lead to an earlier start of the raising interest rates cycle, what is super negative for the stock market and a supporting factor for the national currency (USD).
But the problems doesn’t end up here. The risks of the pandemic’s second wave, which have grown noticeably in Europe, especially the UK, and its pressure in the United States, which has not subsided, once again plunged financial markets into discouragement and pushed investors to new sales in stock markets and a decrease in demand for commodities.
Against all these events’ backdrop, the American dollar began its decline in the Foreign exchange markets. Which again, became quite attractive as a safe currency to stake. Moreover, its pressure has increased so much that even gold, which is usually perceived in periods of instability as a safe haven asset, was under pressure.
In general, I can state that there is a full-scale bearish dynamics in the stock, currency and commodity markets.
What to expect in the middle terms?
In my opinion, the overall negative dynamics in world markets will most likely continue until the end of this month. Perhaps today, following an attempt to recover the shares of companies in Europe and America will also try to adjust. It seems to us that there are no significant grounds for a reversal yet. Too many negative factors will hold back this process. I believe that the decline in the stock markets will continue until the end of the week. At the same time, the US dollar will receive support in the foreign exchange market.
Regarding prices for Oils, Gold and Industrial Metals, I believe that the general sideways trend is likely to continue. An unstable recovery in global demand remains a significant limiting factor against the backdrop of a similarly mixed recovery in the global economy.