Markets
Markets started the week with a constructive bias. Moderna joining Pfizer in announcing positive trial results on a new Covid-19 vaccine triggered a revival of last week cyclical reflation trade. Most European equity markets gained 1%+. In the US, the Dow and the S&P 500 closed at all-time highs, respectively gaining 1.6% and 1.16%. The Nasdaq slightly underperformed, finishing 0.8% higher. The impact of the vaccine news on core bond yields and on the dollar was limited and short-lived. After an initial up-tick, US yields reversed most of the initial gain. US yields changed between -0.2 bps (2-y) and +1.6 bps (30-y). Last week’s top in the 10-y yield (0.97%) stayed out of reach. Markets still ponder the option that some additional Fed support is still possible to lift the economy over the current corona dip. Fed’s Clarida kept the door open for more monetary stimulus even as he sounded rather optimistic on the economy for next year. Changes in German yields were less than 1 bp. Intra-EMU spreads versus Germany (10-y) narrowed a few bp (Italy -2 bps; Greece -4 bps). In line with last week’s price action, the dollar initially gained (modestly) on the vaccine headlines. However, as was the case for US yields, the rise didn’t last. The trade-weighted dollar even closed marginally lower at 92.55. EUR/USD finished at 1.1852. USD/JPY temporaril y spiked north of 105, but this move could not be sustained either (close 104.58). Oil and other cyclical commodities (e.g copper) profited from the reflation trade.
Sentiment on Asian markets turned more subdued this morning. Most indices are switching between green and red, with China slightly underperforming. The yuan is setting a new cycle top (USD/CNY 6.5675 area) as markets ponder whether the PBOC will move to a less stimulating policy. The dollar remains in the defensive even as the risk rally is shifting into a lower gear. EUR/USD is changing hands in the 1.1860 area. Overnight, there were headlines both from Ireland and the UK that a Brexit deal might be possible in the near future. For now, sterling gains remain very modest with EUR/GBP still holding in the 0.8975 area.
Markets still will have to look for a new equilibrium considering the positive impact from the roll-out of a vaccine next year while assessing the negative impact from a further rise in corona infections,in particular in the US. Regarding the data, US October retail sales and production are interesting. They are expected to confirm a gradual further rebound, even as infections are rising. In the current environment, risky assets maybe are a bit more sensitive to positive than negative surprises. However, the data won’t be a game-changer. One can assume the rotation toward cyclical assets to continue, albeit a gradual pace. This rotation in theory is a tentative dollar-negative. EUR/USD 1.1881/1.1920 remains the next upside reference on the technical charts. A test is possible though we doubt time is ripe for a break. For sterling, we look out for more concrete news on a Brexit deal. But even so, the EUR/GBP 0.8865 support is an important reference. Core bond markets have reached some kind of a short-term equilibrium. For now we don’t expect US or German yields to sustainably break above last week peak levels.
News Headlines
Oil prices were boosted yesterday by another vaccine breakthrough in biotech company Moderna as well as comments from OPEC+ advisors. At today’s OPEC+ meeting, they are to suggest a delay of January’s planned output boost by three to six months, an official said. Brent oil surpasses $44 per barrel.
Germany will probably have to live with “considerable restrictions” for at least four or five more months, economy minister Altmaier said yesterday. Meanwhile, chancellor Merkel’s push for more measures, including face masks for all students, was blocked by the country’s 16 state premiers. She urged the public to limit public and private gatherings instead.
