Equities were lower in early European dealing with stock index futures sliding by 25 basis points on slightly risk-off tone and the dollar resumed its downward slide losing about 20-30 pips against most of the major pairs.

It was a generally quiet and lethargic night of trade emblematic of the dog days of summer with newsflow at a minimum and most asset markets essentially treading water. The political stalemate in Washington continued with neither side willing to budge on the next iteration of fiscal stimulus as Democrats stood firm on the figure of $600/week of unemployment benefits as well as multi-billion aid packages to states, while Republicans mainly focused on liability protections for businesses from COVID.

So far the markets have blithely ignored the brewing political and economic risks of a no-deal scenario partly because such an outcome would be so clearly disastrous to the US economy where 40% of all households who rented could not pay their rent bill last month. With wide swaths of the US economy still sidelined the humanitarian costs of the COVID crisis will very quickly explode, so the underlying bet of investors is that despite the posturing the parties will come to terms in DC. But the longer the issue remains unresolved the more nervous the markets will become and it's not at all inconceivable that equities could be setting up for another micro crash if politicians dither on the issue of fiscal relief.

In FX land the calendar was quiet with only RBA decision on tap. The RBA left rates unchanged at 25bp and essentially kept it wait and see outlook intact casting a wary eye at the state of Victoria where the outbreak of COVID has forced a lockdown. The central bank noted that fiscal and monetary support will be necessary for a long time and made no reference to the strength of the currency which gave Aussie bulls some room to run with AUDUSD back up towards .7150 as it remains within reach of recent highs.

The day ahead offers no eco data and markets are likely to be muted unless fresh headlines come out of DC. If there is no progress in talks as the day proceeds the risk-off mood that began in Europe could quickly accelerate to the downside.

Author

Boris Schlossberg

BKTraders and Prop Traders Edge

Boris Schlossberg was key speaker at the FXstreet.com International Traders Conferences 2010. Mr. Boris Schlossberg is a leading foreign exchange expert with more than 20 years of financial market experience.

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