Stocks fell as coronavirus infections swept across US states, triggering fears of more restrictions. The pound pared losses as the UK agreed on further talks with the European Commission to address the trade deal's impasse.
Risk appetite is struggling to find direction amid Brexit headlines, rising Covid-19 case counts and possible further US sanctions on China on the one hand, and hopes for US fiscal stimulus and US vaccine approval on the other.
US equities were weaker Monday, the S&P down 0.4% heading into the close. US10Y yields slipped 3bps to 0.93%. Near-term growth concerns weighed on sentiment after California introduced new lockdown restrictions over the weekend. The number of people hospitalized in the US with Covid-19 reached a new record. Still, to a large degree, price action suggests the stock market remains inoculated to Covid concerns; it's the Brexit" knife-edge" that carries this week's worry baton.
It was a volatile 24 hours for sterling, falling sharply on the UK open Monday only to recover ground in the past few hours. In a joint statement on Monday, UK PM Johnson and European Commission President von der Leyen indicated a deal Brexit was currently impossible "due to remaining differences on critical issues". The Irish PM described negotiations as "on a knife-edge" and the EU's chief negotiator has suggested Wednesday is shaping up as a hard deadline for talks.
Despite fraught headlines, von der Leyen said after a call with Johnson that both had asked negotiators to prepare a list of differences to be discussed in person "in coming days." Chatter about Johnson heading to Brussels to get the deal done has massaged some of the market’s more worrisome concerns that Johnson doesn't want the deal. Presumably, that means before the December 10-11 EU Summit, or maybe even coinciding with it. If so, that would be a proper showdown and bring the highest possible chances of a breakthrough. Should we have expected anything other than a nail biter after multiple years of bitter squabbling? Probably not. And I would suspect trader will now focus less on chasing unreliable headlines and focus on the official facts.
Investors are adopting an all too familiar stance, trying to weigh near-term Covid-19-related headwinds vs. a better long-term vaccine and stimulus-related outlook. But something to think about when it comes to Covid-19 vaccines is the take-up from the general public, which is something The Wall Street Journal [paywall] looks at today. It cites two recent surveys that suggest a fair amount of skepticism in Europe towards the vaccine. A poll in November from the University of Hamburg showed those hesitant or unwilling to take the vaccine was at around 40% across seven European countries. An Ipsos poll taken in early October found that almost one-third of Japanese and nearly 50% of French respondents also said they wouldn't get vaccinated. The Ipsos poll put the primary reason down to concerns over how the vaccine was developed. It’s worth keeping in mind that vaccines don't help the economy recover, but vaccinations do.
But investors are pinning their hopes on the ultimate holiday stocking stuffer, which is the capacity for stimulus overwhelming a near-term downturn. Last week's softer-than-expected US employment report might have injected some urgency into US fiscal negotiations. These center on a USD908bn bipartisan proposal, which one of its authors, Senator Bill Cassidy, suggested would get President Trump and Senate Majority Leader Mitch McConnell "on board" (Fox News).
WTI traded back below $46 a barrel amid softness across commodities and global stocks. The higher dollar added a bit of pressure overnight and weighed on the broader commodity complex.
Prompt oil contracts remain especially sensitive to increased virus caseloads globally. In some cases, problematic healthcare concerns leave politicians with no options but to impose stay at home orders. California, one of the US’s largest road fuel demand states, will be in lockdown-lite through what’s bound to be a Christmas-lite for oil markets. Meanwhile the vaccine development "hope" is largely priced into the back end of the curve.
Over the next few months, and despite worst-case scenarios having all but evaporated, the main driver for oil markets within an increasingly tighter range between now and a wider distribution of the vaccine rollout could be the pace of global vaccinations, especially in hard-hit countries like the US vs. the Covid resurgence speed, similar to how shifts in mobility drove oil through the spring and summer.
As more folks in the general population get vaccinated, mobility will increase substantially. And if the oil price is to be measured by mobility from point A to B, we might have to add T to the equation as travel demand will most certainly see more planes in the sky post-global immunization.
But with the medium-term oil prices now inoculated and the curve moving into backwardation – when prices for delivery in the near term are higher than those for later delivery – the amount of crude oil held in tankers dropped to below 100 mn barrels last week. When the contango is steep, there’s more appetite for storage; the steeper the contango, the more economic sense it makes to hold oil for future delivery.
A key risk to the supply-side remains Iran, which is reported to be preparing to raise production quickly, according to President Rouhani, who expects US sanctions to be softened under a Biden presidency.
The pound has pared back some of its Brexit enthusiasm after a flurry of headlines – some citing earlier progress, others suggesting deadlocked negotiations – saw sterling get pounded overnight. Despite the fraught headlines, the read-through is that negotiations continue. Still, the mood music is somber in early Asia.
It’s a big week ahead for the EUR, with Brexit negotiations, an EU leaders' summit and a key ECB meeting all looming. Squabbling around the EU budget and the associated EU recovery fund continues, potentially delaying funds' disbursement. At the same time, more worrisome lockdown clouds gather on the Euro's near-term horizon. France is unlikely to emerge from its lockdown in mid-December while policymakers in Germany may tighten restrictions in affected areas. These economic challenges, alongside a trade-weighted EUR back to levels not seen since mid-2018, could form the backdrop to the ECB's December meeting.
The Fed blackout ahead of the December 16 FOMC meeting started on Saturday. We’ve now heard what we’re going to hear ahead of that get-together. And while there have been thousands of Fed mentions since the last FOMC, the common theme that continues to echo is the emergency has passed, but the next six months will be challenging so it would seem everything hinges on the vaccine where current visibility is especially low. To expand stimulus now would be to move just ahead of critical new information (Q1 vaccine rollout/efficacy information).
Gold headed for its fourth gain in five sessions, helped by signs of progress on a US stimulus plan and concerns that Brexit talks could collapse.
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With markets relatively quiet ahead of the FOMC meeting, eyes turn towards exotics; Global equity markets continue consolidating; Oil prices extend gains