The shadow of the coronavirus infection again looms over the financial markets, causing a collapse in stock markets with a parallel increase in demand for defensive assets.
The night curfews in France, aimed at reducing the spread of infection, the increase in death cases in Germany, and the surge of COVID-19 cases in Sweden to an unimaginable scale have led to the collapse of European stock indices. The fear of a new complete closure of European countries’ economies, as it was done this spring, increased among investors. Also, the market is frightened by the uncertainty of the election results in the US. This factor remains as crucial as the second wave of COVID-19 and it would be wrong to dismiss it.
Against these events’ backdrop, the demand for defensive assets has sharply increased, which traditionally includes bonds of economically strong countries, primarily the United States and Germany and safe-haven currencies, the Japanese yen and the US dollar. If the dollar grows reluctantly, remaining under the pressure of the unsolved issue with the Fed and the US Treasury’s stimulus measures, the yen on Tuesday added sharply against the USD and continues to gain.
The main currency pair EURUSD is also under noticeable pressure and has been steadily falling for three days. During the 2008-2009 crisis, the euro became an indicator of the demand for risky assets. That is why we see this dynamic of the pair right now. Let me remind you that if the demand for shares of companies grows, then the eurodollar pair also gains, but if it decreases, then the pair is under pressure. It is exactly what we’re experiencing right now.
Given the two essential factors – the spread of the COVID-19 second wave and the uncertainty of the US election’s outcome, I believe that risky assets’ demand will decline. The US dollar and especially the Japanese yen, will receive support. At the moment, investors completely ignore all the economic statistics and entirely focus only on these two factors.
What to expect soon
I believe that the general negative sentiment on the markets will continue until the end of this week. Investors will keep avoiding buying shares of companies in the wake of the COVID-19 second wave in Europe, rising infection cases in North America, and uncertainty about the US presidential election outcome.