Weighing on risk out of the gates this morning is a touch of vaccine safety uncertainty as there are some questions to be answered after news broke that AstraZeneca Plc is likely to conduct an additional global trial to assess the efficacy of its Covid-19 vaccine after studies raised questions over its level of protection – this according to the company's CEO Pascal Soriot.
When it comes to vaccine rollouts – especially emergency use authorization – vaccine safety and accurate data gathering is the ultimate high bar under the FDA’s vaccine approval purview. Indeed, there’s palatable disquiet brewing in market circles as there are bound to be more questions than answers in this vaccine trial setback.
Besides unwelcome vaccine efficacy surprises this morning, many things could easily derail the risk-on party; US President-elect Biden's ambitions are going to be hampered by a split Congress; the Fed is out of influence; growth stocks are stretched, and the conditions are against value, and pre-existing secular economic constraints will bind as the coronavirus case count explosions and the anticipated weak economic data, particularly around jobs, will continue to serve as a reality check to the surge in risk assets.
After a sizzling rally over the past fortnight, European equities were slightly weaker Thursday after investors hit the optimism pause button ahead of the US Thanksgiving holiday, where markets typically come to a full stop.
And FX markets were dominated by a bearish tone from the ECB October minutes and the never-ending Brexit saga, while oil markets shifted into a pre-OPEC profit-taking kind of mood, sliding off recent highs compounded by pre US holiday position squaring.
This week's very encouraging news on AstraZeneca's Covid-19 vaccine's efficacy, which points to a significant acceleration of the global vaccine rollout next year, has improved the economic outlook. Such risk premium compression, higher commodity prices, accelerating inflation expectations, and a weaker US dollar have soothed the runway for a much earlier economic lift-off than the market had expected. Still, there are worrying signs that it might not be a long runway.
Cross-asset volatility has normalized to well below historical averages, suggesting risk-premium compression will not offer sustained help. And when the Chinese credit impulse is negative, as it’s expected to be in 2021, commodity prices can at best be expected to be flat; weakness is typically more common. Both suggest the correction is coming, and it's not if but rather when.
The market might appear to be racing away at the moment, but in reality it’s only just passed prior closing highs. It’s a counterintuitive fact of financial market life that highs get made on good news. 3640/3670 is now a massive resistance band in the S&P 500 as those are the Pfizer and Moderna Day peaks. And with AstraZeneca's failing to take out those peaks, despite hugely better distribution logics, it suggests the impact of each announcement is becoming less cohesive across markets, meaning that vaccine and improved mobility is in the price.
But it’s what’s not in the price that could resurrect the ghosts of Christmas past. Specifically, US President-elect Biden's ambitions are going to be hampered by a split Congress; the Fed is out of influence; growth stocks are stretched, and the conditions are against value, and pre-existing secular economic constraints will bind as the coronavirus case count explosions and the anticipated weak economic data, particularly around jobs, will continue to serve as a reality check to the surge in risk assets.
Just like mice and men, the best-laid plans of forex traders often go awry. Just as the street was making a good argument to "sell the buck" into year-end, the ECB minutes said “please pull in the bullish Euro reigns”.
Dovish headlines from the ECB account of the October meeting (for example “Euro-area recovery was losing momentum” and “ECB accounts: risks tilted to the downside”, both from Bloomberg), together with a dovish speech from the ECB’s Chief Economist, seem to be weighing on the euro.
There’s now an interesting dynamic between Lane and ECB board member Schnabel who, earlier this week, gave a decidedly hawkish speech that emphasized side effects of non-conventional measures and the need to stretch out the 'medium-term'.
The question will be where ECB President Lagarde comes out in this dispute. I still think it's a toss-up, but intuitively the market will assume she would be closer to Schnabel than to Lane until the policy has been signaled as actionable. While I don't think the long Euro trade is in trouble, it's just not as bright as it looked yesterday morning, and folks may wait until month-end and AZ vaccine uncertainty clears before re-engaging any bullish ambitions.
Rightly, the market showed some pre-OPEC nervousness given how quickly oil moved up past $48/b with the tailwind of positive vaccine news and the uncertainty of the US elections (mostly) behind us.
The vaccine hasn’t even been rolled out and the market is already looking to a moonshot. But as we’ve seen from the latest efficacy concerns around the AZ candidate, it should prove a stark reminder that oil markets still have to deal with a bumpy runway during the northern hemisphere winter to bridge the hope gap and eventual vaccine lift off.
I remain optimistic about medium-term prospects for oil, with demand gradually recovering and the impact of underinvestment in new supply likely to become more of a concern as the global economy returns to normal. However, I think the minor correction is a good example of the short-term sentiment risks that lie in wait.
A positive outcome from next week's OPEC+ meeting is priced in, but the vaccine tailwind and oil rally in recent weeks could make it more difficult to build support for the extension of OPEC+ cuts. An extension is still the default outcome, but confirmation of the consensus view will not be an incremental positive, and a failure to extend cuts would be taken badly. Let's just hope the vaccine tailwinds don't become headwinds as the last thing the oil market needs is to get back on the WTI rollercoaster.
As we count down to OPEC's meeting on November 30th, the Axi Expert Series is pleased to welcome Henning Gloystein, Director of Energy, Climate & Resources at Eurasia Group, to discuss his views and insights in what’s an important week for oil markets.
For more market insights, follow me on Twitter: @Steveinnes123
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll