Investors are channeling their positive energies back toward the main tasks at hand: the vaccine taming the virus and restoring the economy's health. US equity futures opened on a positive note this morning, still riding the vaccine tailwinds. Indeed, the vaccine enthusiasm booster shot remains the dominant narrative, even with surging infections across the US to more than a million since the start of November. The vaccine could prove to be the ultimate market backstop and recessionary economic plugger.
Despite mounting health care concerns, it’s very unlikely the US will shift back to a sudden stop lockdown. "That's a measure of last resort," Dr. Vivek Murthy, a former US surgeon general tapped to help lead the group, told "Fox News Sunday," adding that any lockdown at this stage of the pandemic would look different than the sweeping closures which states enacted in the spring to suppress the virus.
Despite the raging global virus case counts, investors show a cheeky bravado, realizing the Monday trap door for risk will not spring even when the Covid case counts and headlines soar over the weekend. The non-typical risk-on Monday morning is due to the vaccine tailwinds and global central banks that will continue to watch the market’s back.
Coordinated central bank messaging
The three most prominent central banks in the market also sprinkled just enough forward guidance fairy dust to ensure investors are confident the market will be sufficiently flush to bridge the gap between now and when the vaccines hopefully arrive.
The persistent message from Fed Chair Powell, Bank of England Governor Bailey, and ECB President Lagarde is the length of time that exceptional policy will be required. This is very positive mood music to the market’s ears and it allows investors to look through the current level of headline Covid uglies.
Beyond a successful rollout of a Covid-19 vaccine (or the expectation thereof), the extent to which tech can perform from here depends on the Fed's willingness to cap higher UST yields.
There was an eerie impasse last week where extreme Covid-19 case rate acceleration and positive vaccine news locked horns, creating a frustrating environment for momentum and trend followers after the initial vaccine booster moonshot. But this could be little more than a case of long term vs. short term horizon traders butting heads, as it did look like two battling rams going at it at times. However, I suspect it will be a lot easier to pitch the equation's positive side once we have another successful candidate – and hopefully one with fewer logistical distribution challenges.
Bears could rightly argue the vaccine timeline is in the price, and the Pfizer news has not 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 that 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.
Jobs will disappear, regardless of the vaccine
Despite last week's unmistakably supportive and coordinated central bank messaging, some jobs will disappear forever as a new age technological transition will not be kind. Some jobs will become obsolete forever, which is something the vaccine cannot cure.
On Friday it was bad news for Spanish jobs as Santander told unions it plans to cut 4000 jobs in Spain; that amounts to 13% of the workforce. Indeed, this is just another example of why the vaccine might not be the economic panacea many were hoping for. The cuts come as the bank plans to close 1000 branches after the pandemic boosted customers' switch to digital channels.
Given the market's enthusiastic reaction to vaccine efficacy, the focus will now turn quickly to quantities and distribution. There’s an important non-linearity here: every additional vaccine produced will become increasingly valuable on the path to herd immunity. In other words, production capacity and distribution matters as we move through the hope phase of the vaccine recovery.
Oil is trading a higher at the open after Dr. Vivek Murthy, a former US Surgeon General tapped to help lead the group, told "Fox News Sunday" that any lockdown at this stage of the pandemic would look different than the sweeping closures which states enacted in the spring to suppress the virus. All the while, oil prices are still riding the vaccine tailwinds supported by OPEC + backstops, and those backstops are ruling out the more worrying demand and price collapse scenarios.
Last week traders speculated that the US could move into very rigid lockdowns over the holiday season, impacting road fuel demand over Thanksgiving and Christmas, so we’re seeing some of those shorts give way at the open as traders back some of those US lockdown worries and oil is climbing a bit.
Still, I look for more of the same trading patterns this week as last week, where optimism around key resistance levels quickly ebbs to pandemic realities; it’s hard to escape the current virus realities when it comes to the prompt oil market prices.
On Friday, oil spent the day in the red in a very narrow range. The vaccine element is priced in, but so is an extension of OPEC+ output curbs into the first quarter of 2021. Both OPEC and the IEA revised their oil outlooks down for the rest of the year and expect oil demand to remain weak well into 2021. This is consistent with the street’s view and suggestion that, with OPEC+ having its next meeting on Nov. 30 and Dec. 1 where they’re expected to decide on output levels, this will be the major catalyst and where the bulk of the risk is for the next shift in price.
On the week, oil prices are up more than 8%. Reflecting the two backstops are better than one narrative is the front of the curve continuing to tighten with Dec20/Jan21 WTI trading at -$0.27 after closing at -$29 for the last two days. The Dec20/Dec21 has widened -$2.27 from the high of -$1.57 touched on Wednesday, but remains much tighter than the -$3.41 close of last Friday.
Gasoline futures also dropped Friday with the front of the curve moving into contango, having been in backwardation since June. The range in the front spread today was an impressive +$0.07 to -$0.28.
According to Baker Hughes, the number of US crude oil rigs increased by ten this week.
Broader FX is a little more active this morning while tentatively trading more favorable in line with positive risk sentiment.
The Euro has a small bid to it as the short USD view holds more broadly, and traders again remain more constructive the Eurozone growth outlook, given the widespread resurgence of Covid in the US and the general backdrop is supportive of risk (US fiscal, lower rates, Biden presidency, the potential for more vaccine headlines). Given the light positioning base, these factors could see the EURUSD hold a bid.
The ringgit should trade more favorably today in line with positive regional risk sentiment after Asia leaders struck a positive chord and agreed to form the world's largest free-trade zone. The Regional Comprehensive Economic Partnership, or RCEP, was signed virtually on Sunday on the sidelines of the annual summit of the 10-nation Association of Southeast Asian Nations (ASEAN).
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.
The gold price has been struggling to find 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 the US 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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USD regains ground on April inflation figures to outperform low-yielding currencies; EUR/USD meets strong resistance; Gold looks increasingly attractive