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Macro review for the current week

Macro review for the current week

6 October 2020

Disease of the President and the Response of Global Markets

Last week, the markets reacted quite negatively to the news of President Trump’s illness. The Dow Jones Industrial Average closed at -1.46% that day, while the NASDAQ Composite technology index fell 2.15%.

Market volatility is mainly driven by investors focusing on how President Trump’s illness could impact the November 3 election. Since many of Trump’s campaign staff have become infected, this could negatively affect the further election campaign of the US President.

Democratic presidential candidate Joe Biden has retained his lead in the polls since the initial debate early last week, but the timing of further debates is now in question.

However, the negative on the markets did not last long, as it became known on Monday that Trump was discharged from the military hospital and arrived at the White House. Later, there were footage of the US President demonstratively taking off his mask. On this news, major world indices resumed their growth.

At the moment, it is known that the president received experimental treatment. On Friday and Saturday, his blood oxygen levels dropped, forcing doctors to give him supplemental oxygen. Trump also received three doses of the antiviral drug remsidivir intravenously, and will be given another dose at the White House on Tuesday, his doctors said.

Questions about Trump’s true health remain, as doctors have provided conflicting data for several days.

The beginning of the second wave of coronavirus in Europe

Recently, cases of coronavirus infection have become more frequent in Europe. Many public figures and politicians began to say that this is the very second wave. It is worth noting that European states have not yet recovered from the spring crisis – unemployment in Europe has risen for the fifth month in a row amid fears that extensive government support programs will not be able to keep many businesses affected by the restrictions associated with the pandemic afloat. The unemployment rate in the European Union at the end of August was 7.4%

Women and young people suffered the most. In August, the number of EU citizens under the age of 25 who lost their jobs was 64 thousand more than in July.

Economists expect EU unemployment to rise further in the coming months as the wage support programs expire. Meanwhile, the surge in the spread of infection in many countries forced the restrictions to be tightened again and to consider expanding them in the future.

The eurozone economy is showing signs of a serious decline in activity amid the introduction of new restrictive measures due to the second wave of coronavirus infection. This is evidenced by the latest poll, on the basis of which the business activity index is calculated. According to the results of September, it was 50.4 points, while in August it was 51.9 points. Approaching the mark of 50 points means a decrease to a minimum, the optimism of business entities regarding growth prospects.

The ruble is losing ground

Over the past two weeks, the ruble has become significantly weaker against the dollar. If we look at the correlation between the ruble exchange rate and the oil price, we can understand that the fair price of the Russian currency, taking into account only the current state of the economy, is no more than 70 rubles. Thus, anything above this level can be considered a risk premium. Since there has been quite strong pressure on the ruble lately – the threat of sanctions from the European Union, the weakening of the economy in connection with the second wave of coronavirus, the possible victory of Biden in the US presidential elections.

Against the background of relatively low oil prices, reducing the flow of foreign exchange into the country, as well as the crisis caused by the coronavirus and the fall of the ruble due to geopolitical risks, the government issued a new directive for state-owned exporting companies to reduce the size of net foreign exchange assets. This will allow the ruble to strengthen as demand rises.

Apparently, the government played a little ahead of the curve, since, as the agency emphasizes, the new directive appeared “in a relatively calm period for the ruble,” although in March the dollar grew by 14.7%, in July – by 4.2%, and since the beginning of summer, the growth as of September 29 exceeded 15%.

Interfax found out that the directive applies to at least three companies: Gazprom (MCX: GAZP), Rosneft (MCX: ROSN) and ALROSA. The gas monopoly informed that its board of directors on October 12 will consider the issue “on the level of net foreign exchange assets”, and on the agenda of the Rosneft council meeting on September 29 there was the issue “On the execution of the directives of the Russian government dated September 1, 2020.

Meanwhile, from the beginning of October, the Bank of Russia also intends to start foreign exchange interventions and by the end of the year to sell the rest of the currency in the amount of 185 billion rubles. This will further strengthen the ruble.

Aravana Capital Management provides clients with profitability even during downturns in global equity and bond markets.

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