Why Stocks Fell but Currencies Rallied

At the start of the NY trading session, investors were buying currencies and equities. The S&P 500 and Dow Jones Industrial Average climbed to record highs, leading high beta currencies such as euro, sterling and the comm dollars higher. Even USD/JPY saw healthy demand with the pair ending the day above 106.00. Although the S&P 500 recovered earlier losses, the Dow still ended the day in negative territory. The early morning reversal was sparked by a significantly weaker than expected consumer confidence report. The Conference Board’s index dropped to 84.8 from 91.7, a six year low. This means that even with low death rates and stabilization of new virus cases in certain parts of the country, consumers are worried that the economy will remain subdued for the foreseeable future including persistent unemployment. So while new home sales were much stronger than expected and manufacturing activity in the Richmond region improved, weaker confidence in August could translate into softer economic activity.   

Yet investors remain optimistic as new virus cases in the US stabilize and pharmaceutical companies move closer to developing a successful vaccine. Both China and US also confirmed their commitment to a Phase 1 trade deal, easing some of the market’s concerns. As long as the positive headlines flow in, the party in equities and high beta currencies can continue.  We are watching the spike in cases in Europe closely but investors have largely shrugged off these developments. Despite the deterioration in Eurozone PMIs, the German IFO increased for the fourth month in a row, helping to drive EUR/USD back above 1.18. The best performing currency today was sterling. There was no data from the UK and the lack of news actually allowed sterling to trade purely on risk appetite.

Positive headlines on US-China trade relations almost always lifts the Australian, New Zealand and Canadian dollars. Investors were unmoved by New Zealand finance minister’s warning that the Auckland lockdown shaves GDP by NZD$500 million per week. Trade data is due for release from New Zealand tonight and given the improvement in manufacturing activity, healthier numbers are expected. All three commodity currencies are overbought but as long as stocks continue to rise, they could revisit multi-year highs.  

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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