The Week Ahead
The economic events calendar is finally looking a bit quieter. However, the ongoing Brexit negotiations, Trumpian travails, Covid case counts, and the vaccine tailwind will be sensitive topics of interest this week.
The sharp rates move following Pfizer's better-than-expected efficacy report on Monday was a circuit-breaker for risk, and markets are now searching for the next driver.
US retail sales and sentiment data (UMich, Empire, Philly Fed) in the US, retail sales in Canada, unemployment data in Australia, and retail sales data in China will be key. There’s a long list of central bank speakers taking the stage, in the US (Williams, Bullard, Clarida, Kaplan, Bostic, George), UK (Haskel, Bailey, Ramsden, Haldane, Tenreyro, Cunliffe), Europe (Villeroy) and Australia (Lowe, plus the RBA minutes) – though ultimately I don’t think current narratives will change much.
Last week was all about investors turning their positive energies back toward the main tasks at hand: taming the virus and restoring the economy's health.
And with the US presidential election results increasingly confirming that Joe Biden will be named the next president, investors will have one less obstacle to hurdle. Still, the power vacuum in the United States raises concerns over virus policy.
There was an eerie impasse last week where extreme Covid case rate acceleration and positive vaccine news locked horns, but this could be little more than a case of long term vs. short term horizon; it will be a lot easier to pitch the positive side of the equation once we clear Friday's options expiry where there’s expected to be some significant rebalancing selling of SPX by risk parity and pensions alike.
Bears could rightly argue the vaccine timeline is in the price, and the Pfizer news hasn’t altered it much, so perhaps newly-minted equity rotation trades and risk-on longs are at risk. Optimists would say efficacy was a huge unknown, and it looks better than it looked two weeks ago. My vote is with the optimists, but let’s see what Moderna reports. Maybe this bullish sentiment mini balloon does need to deflate a percentage or two before the bull market resumes? But this is a market highly prone to "event-driven" Covid resurgence, so it’s impossible to draw a straight line from 3500 to 4000 on the SPX as we enter the new dawn "hope phase" of a fresh bull market run.
FX markets are doing little more than treading water, while European and US stock futures were marginally higher into the weekend. China has congratulated Joe Biden and Kamala Harris for their election victory, though President Trump shows no signs of being about to concede to a resounding market yawn.
The market's focus for the RMB has quickly shifted from vaccine hopes to policy-induced de-leveraging. Various policymakers have recently sent signals about exiting stimulus, and onshore assets – in particular credit bonds – have reacted negatively over the past few days. Collectively, there’s been outright closing of short option USDCNH positions, and some have been rolled to longer dates, and lower strikes in the 6.3-6.1 area, which have less delta, so overall more than 50% of bullish bets have been taken off the board.
Central bankers Jerome Powell (Fed), Christine Lagarde (ECB) and Andrew Bailey (BoE) all spoke yesterday. While vaccine news was encouraging, the overall message was that there was much hardship to get through before it’s widely distributed, which is very consistent with the market view and current position levels, hinting that more monetary and fiscal policy will be required.
Meanwhile, the chance of a US fiscal stimulus package this year is looking slim, though still possible – and even if it did get through, it would likely be on the smaller side. With the White House having withdrawn from the process (per NPR), it will be up to Nancy Pelosi and Mitch McConnell, but the former has said she would not budge from her USD2tn plan (per Politico).
Oil Markets and the winter of discontent
Oil took a hit last Thursday from the surprise 4.28mb build in US crude inventories and the International Energy Agency's cut to estimated 4Q global oil demand by 1.2mb/d. However, the Covid-19 vaccine tailwind is still in effect, despite cautious comments from the IEA on the timing of a positive demand impact. Brent is up ~9% relative to last Friday's lows as the market rules out most of the more extreme downside scenarios for demand in 2021 and beyond.
But tempering any thought of an OPEC+ inspired backstop rally, the oil market will continue to struggle after US mobility restriction extended across New York, Chicago and California. New York Mayor Bill de Blasio warned the school system might shutter if the virus surge continues. He has previously said the lockdown plan would close if the citywide seven-day rolling average Covid-19 infection rate hit 3%; as of Thursday, it was up to 2.6%. Chicago announced a 30 day stay at home advisory starting on Monday that will impact Thanksgiving. And restrictions are ramping up in California, whereby next week over half the state will have moved into a more restrictive tier.
Gold starts to recover - at least into the weekend
Gold is slowly starting to recover from the sharp drop on Monday after the positive vaccine news and broad risk rally. It’s not clear that the breakdown in the correlation with equities should be this sharp, which suggests sticking to long positions.
But even after trading up on Friday amounting to +1 dollar for every basis point drop in the 10Y UST, I think the jury remains out if we see sub-$1,800 before +$2,000 when the next vaccine is rolled out.
US Treasury yields fell on Friday as confirmed cases of the coronavirus in the US reached a record high on Thursday. And Jerome Powell all but confirmed the Fed is not going anywhere after the US Federal Reserve chairman warned Thursday that the "next few months could be challenging." Indeed, lower US yields and the Federal Reserve’s enduring easy money policy gives gold investors a little breathing room. Gold's relative attraction is that it is non-interest bearing and can be repo'd to provide a small positive return. When bond yields are negative, a zero-rate commodity is attractive.
The gold price has been struggling to find a consistent direction over the past month. Most recently, it sold off as vaccine news led to quick steeping of the US yield curve and rotation towards value from defensive assets after Pfizer's great healthcare news. Of course, this does raise the question of whether upward pressure on US real rates will continue and whether this will derail the gold bull market? As such it’s hard to see gold moving out of its current range for the remainder of the year as the reflation bounce is a mid-2021 story when golden wings could sprout again.
Currently, gold is primarily consumed as a hedge against dollar tribulations. As we saw towards the end of last week, gold will be uber-sensitive to shorter-term real rates akin to currency markets.
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There’s a palatable disquiet brewing in market circles as questions get raised over the AstraZeneca -Oxford vaccine data.