Equities kicked off the week with gains on Monday as the Dow Jones Industrial Average rose more than 500 points intraday. At the end of last week, Treasury Secretary Steve Mnuchin and House Speaker Nancy Pelosi revived hope for another coronavirus stimulus package. We didn’t see any new developments Monday, but stocks leaped higher on the possibility of a new deal and reports that President Donald Trump will announce the shipment of millions of coronavirus tests to states urging them to use them to reopen. The first televised debate between Trump and Democratic presidential candidate Joe Biden is also tomorrow night, and investors are eager to hear updated plans from the two candidates on stimulating the economy. No U.S. economic reports were released, but nonfarm payrolls are due Friday and the labor market is expected to improve as states continue with reopening. The greenback lost value against all of the major currencies except for the Japanese Yen.
The most important events on this week’s calendar will be the debates, Chinese PMIs, German labor data, Australia’s manufacturing PMI report and U.S. nonfarm payrolls. As long as Trump performs adequately, however, the debates should have a limited impact on the markets. Biden will most certainly attack Trump on reports that he paid just $750 in federal income taxes in 2016 and 2017, but Teflon Don will most likely get away with pounding the data and claiming it as fake news.
The best performing currency on Monday was sterling, which broke to the upside after three days of tight consolidation. Brexit talks are back on this week and investors hope progress will be made. We are skeptical, but when a currency has fallen as much as GBP/USD (from a high of 1.3480 to a low of 1.2675 in September), it doesn’t take much to trigger a relief rally. The Bank of England has also been sending out mixed messages about its stance on negative rates. Governor Andrew Bailey and MPC member David Ramsden doesn’t seem keen on the idea, but Silvana Tenreyro talked about the possibility.
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The Australian dollar was a close second. Like sterling, AUD/USD sold off aggressively this month. It fell every single day last week. The currency was helped by reports that banks are retracting their rate-cut call and the Australian government sees iron ore prices remaining high. Australia has successfully battled a second wave with only four cases reported on Monday. In response to this improvement, the government finally relaxed restrictions on Melbourne, the country’s second largest city. The 9 p.m. curfew was lifted and child-care centers can reopen. The Canadian and New Zealand dollars also ticked higher against the greenback but compared to AUD and GBP, their gains were modest.
The same can be said for the euro, which failed to strengthen above 1.1680 during the New York session. ECB President Christine Lagarde spoke this morning about dissent within the central bank and the effectiveness of negative interest rates. While she said dissent and discussion are healthy among members of the executive board, the market fears that the division could endanger future policy response.