Global equities up, bond curves steepening, USD down, commodities up; markets started the week with reflationary moves, supported by two of President-elect Joe Biden's virus advisers opposing the US nationwide lockdown, while Moderna's vaccine is showing 94.5% efficacy. And the fantastic news for global risk sentiment is that Moderna's vaccine doesn't need to be stored at Antarctic temperatures like Pfizer's candidate. The long-awaited vaccine efficacy data (well, actually multiple), is the clearest indication that a lengthy period of Covid-19 hardship and healthcare adversity is nearing the end.
It's been a torturous struggle for people worldwide, especially for those whose loved ones have been affected. But, fortunately, multiple bright lights are shinning at the end of the Covid-19 tunnel, which will not only reduce health care concerns but could likely see the S&P 500 high tail it to 4000 next year on an optimistic vaccine outcome with strong growth and still-low very low rates.
On Monday, Fed Vice Chair Clarida said further fiscal and monetary policy support is likely needed. While this isn’t new and supports the idea, the December meeting will see tweaks around QE purchases further out the curve in addition to an extension of Fed emergency facilities – the latter of which he said the Fed is now turning its discussion. Indeed, his comments have "bridging the proverbial gap" stamped all over it.
While stock investors revel in the forward-looking afterglow of the vaccine green lights where hopes are rising, the Fed speak continues to indicate a huge concern for what is bound to be a winter of discontent on the Covid front. However, and fortunately, the persistent message from global central banks is the length of time that exceptional policy is going to be required, suggesting that the central banks (in this case the FED) are 100% committed to seeing this recovery thorough with low rates as far as the eye can see. All of this while continuing to cap bond yields by hinting at possible changes to the US central bank's bond-buying program as it explores ways to keep all economic cylinders firing, even in a virus tempered mobility world.
The Malaysian Ringgit
The Ringgit looks to rise for the fourth consecutive day as regional risk sentiment improves on the heels of the inking of the colossal RCEP free trade agreement. All the while, the broader global markets, including the oil complex, revel in the afterglow of vaccine optimism – especially in South East Asia where the latest Moderna candidate doesn't need to be stored at sub-Antarctic temperature and is much more logistically favorable for regional concerns.
Vaccine trades remain in the spotlight this week after the upside surprise from Pfizer and Moderna’s trial efficacy. While a mix of concerns about positioning and the risk-reward on US election outcomes, and PBoC interventions, possibly held some folks back from entering the long RMB trade, the stars continue to align for a potentially more significant repricing of the RMB as markets shift attention to post-election narratives.
Given China's growth outperformance, a widening C/A surplus, a large potential global appetite for Chinese assets on the vaccine bounce, and greater policy comfort with a stronger RMB, the street sees much more value in selling USD/CNH. I suspect we could hit a 6.40 target in Q1 2021 as FX markets will typically fully price in a reflationary event (vaccine) 8-12 weeks before delivery.
The Thai Bhat
The THB is one of the street’s favored vaccine trades, given Thailand's significant dependence on tourism for economic activity, employment and the CA surplus. Indeed, THB has rallied sharply in response to the Pfizer news and should continue to revel in the Moderna efficacy results – even more so since that candidate doesn't need to be stored as sub-Antarctic temperatures and is much more suitable for tropical use.
But speculative positioning now looks very stretched while verbal intervention is bound to pick up as we near 30. Still, I think the street is unlikely to throw in the towel while keeping both cash and speculative longs for the eventual return of tourist dollars on the multiple vaccine roll out splurge, which should move us well below 30. The lack of supply risks and a return of EM debt flows could help Thai GBs, but low yields afford less buff to global rates sell-off.
Gold rebounded after another vaccine-induced sell-off, thanks to QE hints for Fed Clarida.
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