US elections, Covid-19 & FX markets

BY Chris Andreou

|November 16, 2020

The US election is finally over and President Trump has finally, if not begrudgingly, admitted that Joe Biden won. His unsubstantiated claims as to how he won are falling on more and more deaf ears and markets appear comfortable that it will be President Biden in the White House for 2021.

While the US elections were as much about the handling of Covid 19 as they were anything else, there were still many other important topics that affected the outcome. Now that’s over, the markets return to focusing on all things Covid. In the past 10 days we have received welcome news about a vaccine that is described as being 90% effective. This gave equity markets a boost and saw some return to the good ‘old-fashioned risk on’ type plays, namely buying of JPY crosses and a sharp sell off in Gold. However, as the northern hemisphere enters the winter months, the second wave of Covid infections have been coming thick and fast. A number of countries in Europe have entered into various forms of lockdown to try and stem the tide of infections. There has also been a mass cull of minks, as it was discovered that a mutant strain found in them, could negate the effects of current vaccine development. In the US, infection rates are once again on the rise and a number of states are imposing rules on mask wearings as well once again closing bars, restaurants and gyms. The upcoming Thanksgiving holiday is a major cause for concern as it is the busiest travel time of the year and with that could come an even greater spike in Covid transmissions.

So what does all this mean in the short-term for FX and equity markets? Be prepared for more negative headlines before things start to improve and that could be for as long as 6 months while the winter season plays out. Any vaccines that are handed out before the end of the year will not do anything to improve the current situation and are also most likely to be given out to the most vulnerable. The short term negative impact of a second wave will no doubt soon reveal itself in terms of economic data releases. Expect unemployment to once again rise and economic activity to slow. Health services in some areas may well become overwhelmed and the usual negative headlines to ensue. Domestic and international travel will once again be hit hard after showing some minimal signs of recovery. How the markets react will very much depend on the perception of how long the second wave will last and the degree of longer term impact. Apart from the initial shock back in March, price action has suggested investors believe there will be an end to this pandemic and things will return to ‘normal’. Only time will tell.

As a trader it remains important to stick to your discipline around being cognizant of how much you are willing to risk, planning and placing trades and adhering to sound risk management principles, especially around risk and reward. Stop loss orders are there to protect your investment and take profit orders can assist in capturing favorable moves, especially at times when you are not closely monitoring the markets. Be aware that markets can turn very quickly on any headline, Covid related or otherwise, so be prepared. The next few months will be an interesting time, especially with the transition to a new President in the US. There will be many trading opportunities so be prepared, remain disciplined and plan your approach.

Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. The content of this article does not constitute advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. TIOmarkets is not liable for any damages that may be caused by individual comments or statements by TIOmarkets analysis and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his/her investment decisions.

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Trade responsibly: CFDs are complex instruments and come with a high risk of losing all your invested capital due to leverage.