Post AstraZeneca vaccine view
I can as good as assure you that unexpected market air pockets will become less turbulent from now on, though some markets and stock sectors will naturally struggle to follow-through without stronger growth showing up and more stimulus (monetary or fiscal).
And before the real risk on rotation party starts, the workability of mass vaccinations must be overcome. With herd immunity in sight, that will lead to economic ebullience as social distancing unwinds and the most subjugated sectors dependent on human interactivity will rebound dramatically.
The power vacuum in Washington looks to be sucking less life out of the markets after the General Service Administration gave the nod to Biden as the apparent winner of the US election.
US equities were stronger Monday, the S&P up three quarters of a percent heading into the close. US10Y yields rose 3bps to 0.86%.
Another week has brought another round of positive vaccine news. This time, AstraZeneca (AZ) and Oxford University indicated their vaccine was as much as 90% effective in preventing Covid-19 infection, though also noted efficacy varied widely based on dosage.
The AstraZeneca news is the real deal. The health care world should be ecstatic as the AZ candidate success means most of the developed world will be able to immunize its most at-risk population by the spring, and likely the entire community by mid-year.
It’s an intuitive fact of life in the financial markets 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. So, with the S&P eminis failing to crest even 3600, "risk bulls" could be right to be slightly disappointed by very positive Astra-Zeneca vaccine news. It would seem that each new vaccine story has a reduced positive impact on stocks.
Now the sought-after question is: "How much of the vaccine news is in the price?" I think not much, as herd immunity brought on by worldwide distribution of the vaccines will dominate the natural economic landscape for the next 24 months, at least. The multiple vaccine releases are a watershed moment for healthcare concerns, and Covid hibernation will soon be behind us.
This leg of the rotation into value/cyclicals out of growth/momentum is not as dramatic as the one from two weeks ago. Whether this is due to max leverage or P/E concerns, I suspect the truth lies somewhere in the middle.
I think stock bulls could be excused for not jumping for joy as the current market leaders in aggregated leans are fully valued. Still, there’ll be an immeasurable opportunity in the rotation back to those sectors most hampered by social distancing. But the fact of life in the stock market fast lane is that investors are cooling on big tech as leadership volumes are drying up, with P/Es becoming concerns as investors are quietly checking out undervalued pockets around the globe.
Keeping in mind that it’s US Thanksgiving week and lately the market has been in risk-reducing mode, given that year-end is within reach, it’s difficult to gauge the market's true bull factor.
The move's crux is relative pressure on large-cap tech while cyclicals set new highs, even on a sector-neutral basis. Similar is true for a VIX curve that reset two points lower but is flat week to week. Indeed, this paints a more definitive picture that traders think the macro risk/reward at current levels will stay poor as vaccine news will have a steadily smaller impact on risk re-pricing.
Investors have been reading too many speculative headlines, thinking the FOMC minutes on Wednesday could indicate QE duration extension in December. Fed Chair Powell did not give any indication after the last meeting, nor have recent Fed speakers. The Fed's communication seems to be all about policy's longevity rather than expanding; the board will probably sit tight in December.
I would also say it’s not surprising that Fed officials are staying on the fence. They want to be extra careful not to trigger undue market reactions and not to take sides politically, as we’re still in a very charged environment.
Oil benefited from the vaccine news with WTI trading around $43 a barrel and Brent near $46, even when the USD rallied on positive US PMI numbers and took a bit of steam out of the broader commodity markets.
While the air looks a bit thin above WTI $43, the announcement over the weekend that US Covid-19 vaccinations could begin in early December has spurred another wave of optimism for oil and wider markets, bolstered yesterday by the AstraZeneca version of the vaccine.
Oil markets are rightly jumping for joy as the AstraZeneca delivery is a big deal and means most of the developed world will be able to immunize its most at-risk population by the spring, and likely the entire community by mid-year. The continuing increase in infections in the US and elsewhere has been the primary source of oil demand uncertainty ahead of the OPEC+ meeting at the end of this month. Progress on developing and distributing a vaccine de-risks the path back to normal for oil markets.
If mobility data is a measure of oil price sentiment, in the not too distant future the vaccine will get people back on airplanes and cruise ships into St. Mark's Square. It could be the pent-up travel party of all time!
Abu Dhabi is to step up oil production and increase investment, even though OPEC strives to cut output. Bloomberg reports that Abu Dhabi is to invest $122bn to extract two billion barrels of crude that it recently discovered in its existing oil fields.
The curve has continued to shift, flattening considerably from 3Q21 into 1Q22, with the time spreads from Dec21 now in backwardation. The shortage is priced into WTI from the end of next year as capital discipline remains the priority for oil firms.
As we count down to the meeting of OPEC 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.
The ringgit edged higher overnight, supported by a rollback of some localized social mobility restriction and higher oil prices. Still, the broader USD turned bid on some very surprisingly strong PMI data out of the US. But with US Thanksgiving looming and most US traders booking off a long holiday weekend, the PMI data likely caused some traders to cut short the dollar positions. The street will also start to second guess their dovish FED outlook as the US economy looks on stable footing – even more so with herd immunity now part of the market’s lexicon.
Remarkable price action was seen following the strong US PMI, which normally isn’t a market driver. There were exceptionally strong dollar moves against the yen, franc, euro and gold, while on the fixed income side there’s hardly been any reaction at all. Indeed, this suggests that short dollar positioning has been stretched to the extent that even a relatively inconsequential data print has been able to squeeze it. Meanwhile, on the UST side, the market seems fairly short already, meaning positive economic news has little impact.
We’re still in between themes in G10 FX. The market is clinging to the old USD-negative narrative, but that story has lost its luster as the Senate looks likely to go Republican, US real rates are way off the lows, MMT is dead on the vaccine news and gold looks to have peaked.
The real driver of G10 FX at the moment is mechanical USD selling on the back of Asian FX strength, so as long as that continues the USD will stay heavy (especially AUD and NZD).
Asia rate cuts and Bank of Korea pushback ahead of 1100 are tiny first steps toward less Asian FX strength, but until USDCNH turns, G10 FX will not turn.
Gold will continue to be undermined by the commanding macro theme related to a vaccine recovery and the reduced risks associated with central bank debt monetization or the pursuit of quasi-modern monetary theory. This suggests the vaccine narrative has poked more than a few holes in the currency debasement story.
And while the US dollar should likely weaken as the global economy comes back to life and will offer gold a modicum of support, nevertheless with the base structures (MMT and CB debt monetization) that supported gold on the way up from 1500 becoming less of a factor, gold’s luster could erode with every successful deployment of the vaccine.
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Today’s key charts focus on oil, where the recent rally has stalled amidst talk of a lift in sanctions and speculation of a production boost.