Pfizer coronavirus vaccine news has sharply lifted market sentiment. As the positive news raised hopes that the pandemic will soon be under control and global economy will be back on track, gold price, a traditional safe-haven asset, dived. The benchmark Comex contract slumped almost US$100/oz to settle at US$1853.2/oz. This one-day selloff has erased gold’s rebound made last week. Gold’s weakness can be attributed to several factors, including removal of uncertainty of US presidential election, rising Treasury yields and positive vaccine news raising hopes that global economy could be back on track soon.
Despite Donald Trump’s legal challenges, the market has hailed Joe Biden victory as the next US president. Acceptance of the result suggests that the uncertainty of election has been removed. Moreover, the market anticipates that Biden will take a softer stance on China. Expectations that the new government would not only eliminate a number of trade tariffs against China, but also be less restrictive towards China’s tech industry, have lifted sentiment.
Over the past several weeks, the markets had been pricing in the possibility of a large fiscal stimulus package with Biden being the next president and the Congress under Democrats’ control. However, it appears likely that the Congress will remain divided. While the House of Representatives will continue to be led by Democrats, more seats have been taken up by Republicans. The Senate might still be dominated by Republicans. These suggest more challenges for policy implementation. It is now believed that a stimulus package will eventually be less than US$ 2 trillion, compared with a US$3 trillion bill House Democrats passed in May.
However, the disappointment could readily be erased by the vaccine news. As the Fed suggested at the November meeting, “the path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term”. If breakthrough of vaccine development has raise hopes that the pandemic could be under control in the foreseeable future. Eventual removal of restrictive measures could bring the economy back on track, reducing the need for more stimulus, both from the central bank and the government. This explains the sharp rise in US Treasury yields as well as real yields. 10-Year Treasury yields rallied to 0.96%, highest since March. The yield curve is also lifted upward from a week ago. While staying in the negative territory, 10-year TIPS yield also rose to a level not seen since July. Gold’s selloff is apparent given the persistently strong negative correlation between Treasury yields and gold price.
However, we refrain from being overtly bearish over gold’s outlook. Not least because there will still various hurdles for a safe and effective vaccine to be distributed to a widespread of population worldwide, global central banks will continue to maintain interest rates at historical low levels for years. Indeed, we expect ECB to add further stimulus in December, while RBA will likely expand QE in coming months. The global low-yield environment should lend support to the yellow metal.