Equities v Real Economy: Who To Believe?
The past week has been another week of strong performance on the stock markets around the world. Once again markets have been seen wavering between concerns of a pickup in Covid-19 cases and hopes that the second half of 2020 will see a rebound in economic activity. Most equity markets seem set to end the week up as ‘risk on’ sentiment continues to prevail, helped by some positive news on progress toward a vaccine. The notable exception is China, whose market has fallen by about 5% possibly reflecting concerns about deteriorating relations with the US.
However, as the drop follows strong gains over the previous two weeks Chinese equity indices are still around 10% higher than a month ago. Government bond yields meanwhile have edged down as expectations that interest rates will stay very low for the foreseeable future more than trump any concerns about widening budget deficits.
In currency markets, the US dollar has spent much of the week under pressure particularly against the euro. In part, this reflects a continuation of the trading of the last few months with the dollar rising when ’risk off’ sentiment prevails and slipping when risk is on. However, most recently the dollar has struggled to make gains even in ‘risk off’ phases possibly suggesting growing market concerns about the ongoing rise in US Covid-19 cases.
Sterling is modestly lower than a week ago against the dollar but has slipped more sharply against the euro. However, while the euro is currently buoyant, this weekend’s EU summit, which will see further negotiations on a fiscal stimulus package, may be a significant near-term hurdle. For sterling, EU-UK negotiations on the future relationship, which continue next week remain of key importance.
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None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.