Market Wrap – October 2020

Whilst the coronavirus pandemic has the major theme in the world and financial markets throughout 2020, scarily cases continue to grow, especially in major economic regions like the United States and Europe.  It has been another month and another increase in the number of coronavirus cases all around the world as this now passes 45 million with close to 1.2 million deaths, and this pandemic continues to dominate the economic landscape.  Earlier in the month, the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva has said the economic recovery from the impact of the coronavirus impact will be a “difficult climb”, despite the impact not being as bad as the IMF originally thought.  She explained that “extraordinary policy measures” were to thank for the improved performance.   The IMF does not expect the global economy to return to its pre-COVID-19 levels “over the medium term.”   The U.S. Federal Reserve (Fed) Vice Chair Richard Clarida has said that whilst the U.S. economy has recovered well it may still be a year away from returning to pre-pandemic levels and it may take longer for the jobs market to recover.  “While recovery since the spring collapse in economic activity has been robust, let us not forget that the full economic recovery from the COVID-19 recession has a long way to go,” Clarida said during a presentation to the American Bankers Association Convention.

EURUSD

During the month of October, the EURUSD has spent most of its time trading in a range between support at 1.17 and resistance at 1.19.  To close out the month, it yet again, eased back towards the key 1.17 level where it has found some support.  For the first half of October, the EURUSD rested on support at 1.17 after having recovered in the days before rallying higher back above the key level of 1.17 which has previously supported the EURUSD very well.  During October, the 1.17 has reinforced itself as a key level as it continues to prop up the EURUSD and keep it within the range between it and the other key level at 1.19.  If it was to fall through 1.17, the next obvious support level is around the 1.16 low from a few weeks ago or down at 1.13.  At the end of September, the EURUSD made another run and reached a two year high above 1.19, however it reversed strongly after meeting solid selling pressure.  The 1.19 level has established itself as a key level as it has been resisting prices for the last three months.  

Not so long ago, ECB President Christine Lagarde had painted a relatively positive picture on the economic outlook for Europe, however with lockdown measures being reintroduced across Europe, the situation has taken a turn for the worse.  Many analysts expect a change in December in the current PEPP, which is the ECB’s pandemic emergency purchase program, first introduced in March.  German Chancellor Angela Merkel is meeting with state leaders to discuss keeping schools and nurseries open but closing restaurants and bars.   Meanwhile, French President Emmanuel Macron has announced a return to a strict four-week lockdown period, to apply a “brutal brake” on coronavirus infections.  President Macron called for a “collective effort” to combat the coronavirus, admitting recent efforts to contain the virus were “useful, but not enough”.   “Difficult measures have to be taken,” the president said.

GBPUSD

The GBPUSD in October was similar to the EURUSD in that it traded within a narrow range around the key 1.30 level.  A week or so ago the GBPUSD surged back above the key 1.30 level to reach a six-week high before easing to finish out the month.  The 1.30 level has played a significant role in the price action of the GBPUSD in the last four months and continues to do so.  In the last few weeks, the GBPUSD has rallied well from a two-month low around 1.2650 back up to 1.30 which has resisted prices strongly, before the recent break.  During the last few weeks, the GBPUSD has also received support from another key level at 1.2650.  Having placed downward pressure on price in August, the 1.3250 level will also be expected to offer some resistance should the GBPUSD continue to rally higher.  The 1.2650 level did well to support price, and allow it to rally higher and push back above the 1.30 level.  Should the support at 1.30 fail, the 1.2650 will be expected to step in and provide some support again.  

As coronavirus cases in the United Kingdom increase again, the Bank of England (BOE) Governor Andrew Bailey has said the central bank is prepared for a second wave.  The BOE insists it is 'by no means out of firepower' and will respond 'promptly and strongly' to support UK economy during second wave of coronavirus.  Recently, a BOE policymaker, Gertjan Vlieghe, has indicated the central bank will need to pump more economy into the economy and seriously consider the case for the negative interest rates.  "Given that virus prevalence has been increasing again recently, it is likely to weigh more heavily on economic activity.  Indeed, it appears that the downside risks to the economic outlook are starting to materialise,” Mr Vlieghe said.  The United Kingdom faces a "tremendous challenge ahead" with joblessness now forecast to be far higher than previously expected, Mr Vlieghe said.  

AUDUSD

Unlike the GBPUSD and EURUSD, the AUDUSD has experienced a decline during October generally moving from the key level at 0.7250 which has strongly resisted prices down to the other current key level of 0.7050 which has supported the AUDUSD in the last two weeks.  Generally in the last few weeks, the AUDUSD has spent most of its time trading between these two key levels, after having fallen sharply through the 0.7250 level down to a two month low below the key 0.7050 level, although it is finishing the month trading below the 0.7050 level and looking like remaining below there.  Before dropping into its current range, the AUDUSD spent around two weeks resting on support at 0.7250 after easing away from a two year high above 0.74, which is why the 0.7250 has offered resistance since.   The 0.7050 level has played a key role in the last few months first providing resistance to the AUDUSD and more recently supporting price, and the next level likely to offer support will be 0.6850.  

In its October board meeting earlier in the month, the Reserve Bank of Australia (RBA) kept the official cash rate at its historic low of 0.25%, however speculation has since arisen that the RBA may cut further towards zero.   Speaking at an investment conference a few weeks ago, RBA governor Philip Lowe hinted that the central bank would consider cutting interest rates even further, in order to support jobs growth and alleviate currency pressures.   “When the pandemic was at its worst and there were severe restrictions on activity, we judged that there was little to be gained from further monetary easing,” Governor Lowe said.  “As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.”  Referring to the nation’s largest deficit since the Second World War, Mr Lowe said, “For a country that became used to low budget deficits and low levels of public debt, this is quite a change.”

US30

Whilst it started the month of October moving strongly higher, the US30 index has experienced a very strong fall to finish the month, moving to its lowest levels in nearly three months.  The 29000 level has offered stiff resistance to the index in the last two months and its recent fall smashed through any possible support at 28000 and 27000.  For the last three months, the US index has moved mainly between support at 27000 and resistance at 29000, although the former level has given way to immense selling pressure.  The latest rejection at 29000 reinforces how significant this level has become so it will be interesting to see if the index makes another run to break through.  Whilst it has spent many weeks now trading between support at 27000 and resistance at 29000, the 28000 level has played a lesser role providing both support and resistance.  For a few weeks in July the US30 index met resistance at another key level of 27000 whilst bouncing off support at 26000, and the 26000 level may be called upon again shortly to help prop up the index.  

There are some grave concerns about the United States economy as unfortunately, in the last week or so, coronavirus cases around the world have set new records including in the United States.   Recently, the U.S. Federal Reserve (Fed) maintained its promise to keep interest rates near zero and keep them there until inflation rises consistently, with some individual Fed members indicated interest rates could stay anchored near zero until 2023.    So, whilst the central bank is attempting to navigate the country through the pandemic, the country is only going to make it more difficult as the nation is set for a difficult winter.   Dr. Scott Gottlieb, the former U.S. Food and Drug Administration commissioner said, “I think we’re going to bear a lot more infection ... and the health-care system is going to have to bear the brunt of this burden, because I don’t think you have the popular will for stay-at-home orders or broad mitigation.”   The increase in cases in several states are leading to more hospitalizations and will ultimately lead to more deaths, White House coronavirus advisor Dr. Anthony Fauci said.

Gold

There isn’t much to write about for the XAUUSD in October, as for the most part of the month, gold has traded right around the key $1900 level, which has played a significant role in the last three months, before in the last week when it finally broke through the strong support to fall to a one month low around $1860.  For most of the month, the XAUUSD has spent most of its time trading back and forth around this level, after falling strongly through the $1900 level which had been providing strong support for many weeks, down to a two month low below $1860.  The $1900 level may offer some resistance if the XAUUSD attempts to rally or it may just return to trading right around this key level.  In early August, XAUUSD fell sharply from its all-time high around $2075 however it was stopped well by the support around the $1900 level which has been able to buffer the fall and allow it to consolidate in the time since, even allowing it to rally back above $2000 before returning to support.

As the world continues to tackle the coronavirus pandemic, gold has been enjoying a resurgence as investors flock to this haven, although it has lost some lustre in the last month.  In June the International Monetary Fund (IMF) forecast a contraction of 4.9% in global GDP this year, however the global economy has performed better than expected since April.  “The picture today is less dire. We now estimate that developments in the second and third quarters were somewhat better than expected,” Ms Georgieva said in a speech in Washington, D.C.  She explained that “extraordinary policy measures” were to thank for the improved performance.   “Governments have provided around $12 trillion in fiscal support to households and firms. And unprecedented monetary policy actions have maintained the flow of credit, helping millions of firms to stay in business,” she added.  The flipside to all of the spending has been the unprecedented levels of debt soaring higher and according to the IMF, global public debt will reach a record high of 100% of GDP this year.   The IMF does not expect the global economy to return to its pre-COVID-19 levels “over the medium term.”

UK Oil

UK Oil has experienced a wild October moving sharply from the long-time key $43 level down to a four-month low near $37 with some very volatile trading sessions.  In the last week or so, UK Oil fell strongly away from the key level of $43 which continues to play a role and in recent time, has provided resistance.  For the last few weeks, this level has been providing stiff resistance and constant downward pressure on prices.  The latest period of rejection was on the back of a strong rally in early October which saw UK Oil move from a three month low below $39 back up to the key level at $43, however this low at $39 has now been passed.  In the last few weeks UK Oil has made repeated attempts to break through the $43 level which reinforces how significant this level is.  It has spent the best part of the last two months trading below this level after falling sharply through it from a six-month high above $46.  UK Oil reached the six-month high after very slowly but steadily moving higher in a period of very low volatility, although the volatility has return in the last month.  

The International Monetary Fund (IMF) has weighed in on the economic recovery of the Middle East and oil prices, in its latest regional outlook report released last week.  Jihad Azour, director of the IMF’s Middle East and Central Asia department, made specific mention of the inequality in economic loss between oil importing and exporting countries, due to the coronavirus pandemic and drop in oil prices, in a recent interview.   “Combined together, those two shocks led to a sharp decline in economic activity that is different between oil exporting and oil importing countries,” Azour said on CNBC.   “On average, we will see growth going negative by 6.6% for oil exporting countries, and negative growth of 1% for all importing countries,” he said, adding that there will be differences between the countries within each group.  The IMF doesn’t see oil prices recovering significantly in the near future, predicting prices will remain in a range between $40 to $50 throughout 2021.   “The projections for oil prices are in the corridor between $40 to $45 for ... early next year, and will be between $40 to $50” next year overall, Azour said.