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The European Factors and Trump's "Vows" to Accept a Power Transfer Drive Markets

Published 16/10/2020, 13:56

The global stocks made a deeper downside correction on Thursday, perhaps because they were frightened by the clearly slowing economic recovery in Europe and a possible vulnerability of the asset prices during the following weeks before the U.S. presidential elections. However, later in the day the S&P500 broad market futures and the major European indexes recovered by almost a half, as new hopes of the EU-U.K. trade deal came, plus the sitting U.S. President Donald Trump admitted he would accept a peaceful transfer of power although casting doubt on a fairness of the election results.

As the European Central Bank (ECB) Governing Council member Olli Rehn said, near-term prospects are at risk of underperforming the ECB’s own muted expectation as a fresh wave of the pandemic forces governments to impose more restrictions on everyday life. “Some recent indicators, especially from the service sector, have been somewhat disappointing, which amplifies the downside risk to the economic recovery. The shape of the recovery in my view could be best described as a truncated square root,” he remarked. These words sound similar to the rhetoric by Klaas Knot, the Dutch central bank President, who remarked on Tuesday that "early indicators point at slowing growth" and "the second wave [of infections] will dent the recovery, but it is too early to say by how much." Olli Rehn, who is also a central bank governor in Finland, added that initial 2023 growth and inflation projections to be published in December will be key, but inflation risks are on the downside and it would be better for the ECB to better safe than sorry when it comes to providing stimulus.

So, the good side of the news is that the ECB may follow the U.S. Federal Reserve (Fed) to allow inflation indicators exceed its previous target temporarily. Mr Rehn argued that the new economic realities guiding the Fed are also applicable to Europe. New jobs no longer come at the cost of fast inflation, because the inflation is slow or even deflation takes place at some months, so the central banks need to boost inflation by rather artificial methods. “From the point of view of economic and social welfare, it makes sense to accept a certain period of [inflation] overshooting while taking into account the history of undershooting,” Rehn proposed being among the first European policymakers to publicly discuss the impact of policies on low-income workers and a broader interpretation of the ECB’s inflation-fighting mandate.

“While price level targeting as suggested by (Former Fed Chair) Ben Bernanke or average inflation targeting is open to criticism from the point of view of communication, in this context is nevertheless worth exploring in depth,” Rehn added. All these statements may encourage markets to adopt to a more "money printer" type stimulus also in Europe, as the ECB informed the Governing Council members before they started to review its policy strategy and is expected to refine its own target later this year or early next year. "We would accept inflation overshooting the point target or undershooting the point target for a period of time, as long as we’re on path to converging to our medium term, symmetric price stability target," Olli Rehn concluded. As for Klaas Knot, he shared the view that the ECB "would monitor the need to extend its own emergency support measures but would need more information on the economic outlook to make a decision".

Some positive corporate news also came from index heavyweights Daimler (LON:0NXX) and LVMH (PA:LVMH), after the German carmaker posted its Q3 results which beat the forecasts, and Daimler stock rose 4.2%. Moet Hennessy Louis Vuitton SE (LVMH) shares surged more than 7% today after the luxury fashion conglomerate reported a strong growth in the third quarter. But the economy is still dependent on the developments of COVID-19 as residents of Paris and eight other French cities face a 21.00-6.00 curfew and Londoners are banned from mixing with other households.

On the Brexit trade deal negotiation front, a message was sent by the U.K. Foreign Secretary Dominic Raab who said on Friday that Britain "is disappointed by the EU's demand that London give more concessions" to secure a trade deal but "a deal is close and can be done". His words boosted the U.K. FTSE 100 index for a while, as GBP/USD quickly bounced from the 1.2885 to 1.2950 area this morning. Prime Minister of the United Kingdom Boris Johnson asserted on Friday that it is time for the country to "get ready" for exiting the European Union without reaching a trade deal with Brussels. "Unless there's a fundamental change of approach, we should go for the Australia solution," the prime minister stated, accusing the bloc's leaders of "abandoning" the ambition to agree on the trade deal. "What we're saying to them is come here, come to us, if there's some fundamental change of approach," Johnson underscored.

So, it is still a big question if the British currency and assets could hold the recent gains on a still rather uncertain background of Brexit deal negotiations, which may be a lasting long factor also in November. Many in the world's investment community prefer to hide their additional savings inside the shares of growing companies at stock exchanges on Wall Street or to transform some part of capital into the Treasury bonds of the United States, and the specific choice quite often depends on a greater or lesser risk inclination factors at a particular moment.

For the time being, stock market investors are happy to get a verbal confirmation that Donald Trump acknowledged an opportunity of a peaceful transfer of power if he loses the election, at least in a contradictory form. During a town hall event in Miami, Florida hosted by NBC News’ Savannah Guthrie, she questioned the president’s recent statement by saying that his answers in the past have not been clear and by also referencing the president’s warnings of widespread voter fraud due to the large scale of mail-in voting. “When I see thousands of ballots dumped in dumpsters and when you see military ballots dumped in garbage cans... they spied on my campaign and they got caught and they tried to take down a duly elected sitting president, and you ask if I will accept a peaceful transfer of power?” Trump said. “The answer is yes, I will. But I want it to be an honest election, and so does everybody else. Ideally, I don’t want a transfer—I want to win,” he added. Donald Trump and former Vice President Joe Biden spoke in two respective city hall events on Thursday, on the same evening when a second presidential debate was supposed to occur virtually before it was cancelled because the president refused to participate in virtual debates.

At the end of September, Trump said at a White House news conference: “Well, we’ll have to see what happens. You know that. I’ve been complaining very strongly about the ballots. And the ballots are a disaster.” Then the president had been asked by a reporter if he would commit to a peaceful transfer of power and the reporter noted that “people are rioting.” Trump replied: “Get rid of the ballots, and you’ll have a very - you’ll have a very peaceful - there won’t be a transfer, frankly, there’ll be a continuation.” “The ballots are out of control,” Trump said. “The Democrats know it better than anybody else.” The Biden campaign responded that time by saying: “The American people will decide this election. And the United States government is perfectly capable of escorting trespassers out of the White House.”

The question of whether the transfer of power matters in the United States is far from an idle question, since four years ago, Democrats formally recognised Trump's victory but they immediately started to try impeachment procedures and blocked almost all the major White House bills in Congress. It looks like they still haven’t accepted the results of the 2016 election, and a lack of clear power distribution was felt for at least the two first years of Trump’s presidency. Given all the current political deadlocks and street violence spikes, nobody really knows, would anybody have the real power authority in the U.S. after elections, regardless of any kind of actual voting system, so the markets may become nervous again any day before November 3 or even after the announcement of the first preliminary results.

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