At first, it may seem like volatility risk was avoided in financial markets. After the worst week on Wall Street[1] since March, the past 5 days saw equities eke out slight gains. Yet, foreign exchange markets showed dynamics of risk aversion. The anti-risk US Dollar[2] and Japanese Yen[3] rose. This is as the growth-oriented Australian Dollar[4] fell. Gold prices[5] remained in range-bound trade.
After a rosy start, the S&P 500[6], Dow Jones and Nasdaq[7] Composite struggled to find follow-through. In the background, there seem to be rising fears of a second wave of the coronavirus. New hotspots emerged in Beijing. In the US, states like California, Florida and Texas reported record single-day rises in Covid-19. Meanwhile, the Fed’s balance sheet shrank the most this year[8].
Rising cases may pressure local government officials to pause or unwind lockdown easing measures. As markets are forward looking, this could offset further rosy surprises in economic data from the world’s largest economy. Traders will be awaiting US durable goods orders, Markit PMIs (manufacturing & services), personal spending and University of Michigan Sentiment.
The Reserve Bank of New Zealand and Banco de Mexico (Banxico) have interest rate decisions ahead. Investors will be eyeing their economic assessments. The International Monetary Fund (IMF) will also update its 2020 outlook. Further grim projections could derail risk appetite further. What else is in store for financial markets in the week ahead?
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Fundamental Forecasts:
Euro Forecast: Outlook for EUR/USD Negative on Second Wave Fears[10]
Fears of a second wave of coronavirus infections as countries ease their lockdown
