Equities Slide as COVID-19 Infections Hit New Daily Record

Major EU and US equity indices were a sea of red yesterday, with the negative appetite rolling into the Asian session today. It seems that the optimism surrounding a potential coronavirus vaccine has already faded, with yesterday’s new record high in global daily infections from the coronavirus adding to investors’ concerns.

Risk-linked Assets Fall, Safe Havens Shine on Accelerating Virus Cases

The US dollar traded higher against the majority of the other G10 currencies on Thursday and during the Asian session Friday. It gained against NZD, NOK, CAD, GBP, and AUD in that order, while it underperformed versus JPY, EUR, CHF, and SEK.

The strengthening of the safe-havens dollar, yen, and franc, combined with the weakening of the commodity-linked Aussie, Kiwi and Loonie, suggests that risk aversion prevailed in the financial world yesterday and in Asia today. Indeed, turning our attention to the equity world, we see that major EU and US indices were a sea of red, with the negative investor morale rolling into the Asian trading today. Although South Korea’s KOSPI is currently up 0.74%, Japan’s Nikkei 225, China’s Shanghai Composite and Hong Kong’s Hang Seng are down 0.53%, 0.86% and 0.34% respectively.

It seems that the optimism surrounding a potential coronavirus vaccine has already faded, with yesterday’s new record high in global daily infections from the coronavirus adding to investors’ concerns. Remember that we’ve been repeatedly noting that despite the positive news with regards to a vaccine, it is too early to start cheering that the covid-era is behind us, and yesterday’s acceleration in infections confirms that view. The latest correction in risk-linked assets suggests that market participants share the same view as well. However, even if we see some further correction or consolidation, we don’t expect a bearish trend reversal. We repeat that we are now one step closer in finding the cure for the virus, which combined with Biden’s victory in the US elections may allow investors to push risky assets back up at some point soon.

If indeed this is the case and equities rebound again in the foreseeable future, we would expect currency pairs consisting of a risk-linked currency and a safe-haven one to perform in a similar fashion. Such pairs are AUD/USD, AUD/JPY, NZD/USD, and NZD/JPY.

Euro Stoxx 50 — Technical Outlook

The Euro Stoxx 50 cash index traded lower on Thursday, after hitting resistance near 3475 on Wednesday. That said, despite the current retreat, the index continues to trade above the prior downside line taken from the high of July 21st, and thus, we would treat any further declines as a corrective phase. We still see a somewhat positive near-term outlook.

A dip below the 3375 barrier, which provided strong resistance between August 12th and September 3rd, would confirm the continuation of the current correction and may initially target the peaks of October 12th and 13th, at around 3300. The bulls may take control again from near that zone, or near the aforementioned downside line, pushing the index back up to the 3475 barrier. A decisive move above that level may target the inside swing low of January 31st, at 3615, the break of which could pave the way towards the 3730 territory, marked by the high of February 24th.

In order to abandon the bullish case and start examining larger declines, we would like to see a drop back below 3140. The index would be back below the downside line drawn from the high of July 21st, and may tumble towards the 2905 zone, near the low of October 30th. Another fall, below 2905, may see scope for extensions towards the low of May 14th, at 2710.

AUD/JPY — Technical Outlook

AUD/JPY traded lower yesterday, falling back below the support (now turned into resistance) level of 76.25, marked by Tuesday’s low. Overall, the pair continues to trade above the prior downside resistance line drawn from the high of August 31st and thus, even if the retreat continues for a while more, we will see decent chances for another round of buying.

As we already noted, the current retreat may continue for a while more, perhaps until the rate challenges the key support zone of 75.45, which provided strong resistance on November 4th and 5th. The bulls may recharge from near that zone and shoot for another test at around 76.25. If they manage to overcome that hurdle, their next stop may be the 77.00 territory, which prevented the rate from moving higher on Monday and Wednesday.

On the downside, we would like to see a clear fall below 74.55, a support marked by the low of November 5th, before we start examining the bearish case. The rate would already be below the pre-discussed downside line and may initially fall towards the low of November 4th, at around 74.05. Now, in case that zone is not able to halt the slide, we may see the slide extending towards the low of November 3rd, at 73.60.

As for Today’s Events

During the European session, Eurozone’s 2nd estimate of GDP for Q3, and the employment change for the quarter are coming out. The 2nd estimate of GDP is forecast to confirm its preliminary print of 12.7% qoq, while no forecast is available for the employment change.

Later, from the US, we get the PPIs for October and the preliminary UoM consumer sentiment index for November. Both the headline and core PPI rates are expected to have held steady at +0.4% yoy and +1.2% yoy respectively, while the UoM index is forecast to have risen fractionally, to 82.0 from 81.8.

As for the speakers, we have five on today’s agenda: ECB Governing Council member Jens Weidmann, New York Fed President John Williams, St. Louis Fed President James Bullard, BoE Governor Andrew Bailey, and BoE MPC member Silvana Tenreyro.

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