It’s not entirely clear “why”, but equities were reasonably well supported Wednesday, as Wall Street looks to build on Tuesday’s rebound after a chaotic start to the week threatened to turn this month’s tech slump into something more nefarious.

The pound touched a two-month low before paring losses. The UK seems to be creeping back towards another virus lockdown, a scenario Dominic Raab did not rule out. This comes atop Brexit worries. The new restrictions unveiled by Boris Johnson on Tuesday and the prospect of a nationwide shut-in pretty much renders flash PMIs out Wednesday stale. In recognition of Brexit risk, JPMorgan moved $234 billion to Frankfurt, putting it on track to become one of Germany’s largest banks.

Flash reads for September on services sector gauges in Germany and France showed recovery momentum stalling, and in fact going into reverse.

“The sharp rise in COVID-19 cases recorded across France during September helped to explain the first fall in business activity since May”, IHS Markit’s Eliot Kerr said. “August data had already pointed to a slowdown in the recovery but now the path towards pre-coronavirus levels of activity has gone into reverse”, he added, noting that “the rise in case numbers has been accompanied by fresh restrictions, but has also caused hesitancy among businesses due to fears of a second round of temporary business closures”.

Manufacturing held up better across the bloc, suggesting a two-tiered recovery is taking shape as the persistence of the virus serves as a perpetual drag on services activity, while factories are perhaps less affected.

“With services business activity falling for the first time in three months, the recovery in the tertiary sector has possibly reached a ceiling thanks to ongoing social restrictions and still-high levels of uncertainty in the economy, including around job security”, Phil Smith, Associate Director at IHS Markit, remarked, commenting on the outlook for Germany. “In contrast, manufacturing is still rebounding strongly thanks in part to improving export demand, with sharply rising levels of output and new orders helping to slow the rate of job losses in the sector”.

None of this bodes particularly well, although I suppose if there’s a silver lining it’s that it could take some of the steam out of the euro rally which was on the brink of becoming problematic given the deflationary impulse across the region.

All of the above supports the dollar. That’s not necessarily pernicious — until it is. Dollar strength, if it runs too far, too fast, tightens financial conditions and can undercut risk sentiment.

“The BOE and RBNZ are looking at negative rates, an RBA cut to 0.1% before the end of the year seems consensus, eurozone PMI data underwhelmed [as] COVID infection rates damage the idea that Europe is coping with the pandemic better than the US, even if hopes of further fiscal support for the US economy have taken a beating”, SocGen’s Kit Juckes wrote Wednesday, encapsulating some of the push-pull. “All of this underpins the dollar, which is helped, too, by higher volatility this month than in September”, he added.

The greenback trimmed gains as US market participants wandered into their (home) offices for another day on the “job”.


 

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