"We've never seen anything like this. Our spring surge and summer surge were nowhere like this." – Rep. Mike DeWine, Ohio Governor.
After a statement like that, investors can bless their lucky stars that a vaccine is on the way!
Despite some truly remarkable news on the healthcare and vaccine front this week, which saw investors cheering to the rafters, global stock markets stalled on Thursday as investors simply couldn’t shake the sentiment-crushing aspects of the continually soaring Covid-19 cases and the unpleasantries of new economic restrictions.
US equities traded mixed on Thursday as the week's vaccine rally faded and record virus cases fueled new concerns about mobility restrictions over the upcoming festive season, provoking a considerable amount of market soul searching into the weekend.
It feels a bit deflated for US equities today, with single-stock volumes dropping sharply as the day goes on. As risk appetite starts to show cracks, the anticipated risk parity and pensions selling may put pressure on the market at a time when short interest is already at a seven-year low, and the market is under-hedged.
The roller-coaster of the last two weeks seems to have finally come to a halt; everybody is exhausted. Still, overall the market feels vulnerable as rates start to pull back a bit. Indeed it’s "hard to shake the disease in situations like this".
US equities were weaker Thursday, S&P down 1½% heading into the close. US10y yields fell from 9bps to 0.88%. Reversing the vaccine risk rally earlier this week, more immediate concerns about rising infection cases dominated sentiment overnight. The US has now registered nine consecutive days of new infections above 100,000, and new mobility restrictions have been imposed in various states. This quote, from the Governor of Ohio, sums up the state of things: "We've never seen anything like this. Our spring surge and summer surge were nowhere like this."
The next catalyst to propel the vaccine narrative has to be efficacy results from AstraZeneca (its vaccine does not have the same infrastructure challenges as Pfizer's). However, these are not expected until late December/early January. Therefore, marketers are likely to find themselves in a bit of range, pending the reopen trade in 2021.
It’s hard to bid my usual in the market this morning as the virus's third wave spread is ravaging the US and forcing tighter lockdown restrictions.
The oil market had a troubling day as the slide started on the IEA comment that demand will not recover until well into 2021. This was compounded by the huge divergence between the API stats earlier in the week. The DOE oil stocks total was an absolute shocker that saw oil sell off quickly. The DOE saw a large build rather than a very large draw, as estimated earlier in the week by the API, which has all but put to bed the vaccine-inspires short squeeze rally.
Unequivocally, the market needed a comparable draw to keep the vaccine trade momentum going. However, now it feels like we’re back to square one as oil prices in the next few months will still be driven by the demand outlook and the perception that OPEC+ has a handle on supply as the global economy gradually returns some semblance of normalcy.
OPEC officials have suggested that current production cuts may be extended 3-6 months when the group meets at the end of November, in response to recent macro developments with the current views centering around a 3-month extension. However, given the extent of this second and third wave surge in coronavirus infections in the US and Europe, it’s prudent for a more gradual easing of agreed cuts to at least be considered. Whether we ultimately see deeper cuts proposed or implemented will depend on how the outlook changes between now and the meeting. But with the market still struggling to gain traction, and fearing a holiday lockdown, it’s absolutely key that OPEC continues to demonstrate a level of responsiveness and flexibility.
The number in the spotlight today was Refinery Utilisation, which came in at -0.80% due to storms in the Gulf of Mexico affecting refineries alongside seasonal maintenance shutdowns. Despite the build in oil stocks, aggregate demand was up. Both jet fuel and diesel saw total draws as evidence that demand was reflected in the products, rather than oil drawdowns.
Interest rate differentials – so often a principal driver for FX through both the signaling and carry structures – already show less vigor for currencies. This suggests the most apparent nominee to drive FX performance in this "new normal regime" is the comparative growth.
The bullish dials are pointing to AUD, NZD, NOK and SEK as the first pass candidates, and the laggards are likely to be the GBP, EUR and JPY. With the dollar smack dab in the middle of all divergencies, I think it’s pretty clear that idiosyncratic drivers will be the key in 2021 currency outlooks.
The ringgit is holding near the 4.13 mark after struggling this week under a rancorous political cloud of despair which saw day after day of budget disputes making front-page news in Kuala Lumpur. Today, traders hope for a more sobering decline in 3 Q GDP ( -7%) vs. Q2 17.1% plunge. But, for immediate concerns, the ringgit is getting little help on the energy front as oil prices once again are succumbing to the gnarly global Covid-19 outbreak.
Risk-off sentiment and falling UST yields capped any upwards momentum in USDJPY this morning as the Covid-19 situation in the US remains extremely severe and the FED does its dovish best to suggest the status quo of easy money policy will go on as far the eye can see.
The Australian Dollar
The Aussie is consolidating at the low end of the recent range where the currency felt the added weight of AUDNZD selling, which saw the cross touch at its lowest level since April as the ravaging spread of the virus in the US forces tighter lockdown restriction. But given that the Australian economy is likely to be an outperformer on the global comparative scale, dips buying should soon start to appear on the street, chasing AUDNZD lower.
Gold remains an asset looking for a purpose. UST yields dropped overnight and the dollar was relatively flat again. The EURUSD and gold traded flat, so by all accounts gold is little more than a mirror reflection of the EURUSD these days while trying to find a new narrative to ride between now and a possible inflationary wave later in 2021.
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