Vaccine hype losing its momentum.
With AstraZeneca the latest drug maker to announce its late-stage trial results, the vaccine hype train keeps on rolling. Even though the efficacy rate is only 70% - much lower than that of Pfizer or Moderna – the announcement injected another dose of relief into global markets on Monday. The markets are moving on the logic that the more vaccines become available, the better for the global economy, even if not all of them are completely efficient.
What’s striking is the degree to which each new round of vaccine news represents a diminishing return. This is the third Monday in a row when encouraging vaccine news has hit the markets, and each time the positive impact on equities and other risk-linked assets has been getting smaller.
What’s worse is that the brightening prospects for next year are not quite enough to eclipse the grim reality facing investors. Vaccine announcements are great news, but the global economy awaits a long winter first.
News priced in? Watch the Fed
The dominant theme for the time being is vaccine euphoria against lockdown reality. We expect this theme to be the main mover in the financial markets in the coming period. The key question is whether all the positive news has been priced in by now, leaving markets vulnerable to any negative headlines as we go forward. In this logic, the coming price action could rely on whether the Fed signals a further round of quantitate easing (QE) next month.
Policymakers have kept their cards in their chests as they awaited the US election results. Congress is unlikely to delivery any substantial fiscal relief any time soon. But with partial closures in some states continuing, they may soon not have a choice. The minutes of the latest FOMC meeting are out on Wednesday.
Markets still in optimistic mode
For the time being, markets are in optimistic mode with US future contracts (Dow Jones) pointing to an almost 0.5% higher open on Wall Street and commodity currencies such as the New Zealand and Australian dollars shining.
At the time of writing, the Kiwi/dollar is hitting a two-year high at 0.6969, while the Aussie/dollar is trading above 0.7300. Meanwhile, crude oil is also pushing higher on the brightening outlook for demand next year and expectations OPEC will keep its production cuts in place.
No major Brexit headlines yet - but pound still shines
Lately, the real outperformer in the forex markets is the British pound, which is off to the races amid growing hopes that a Brexit deal is finally within reach. There haven’t been any fresh headlines surrounding the talks, though the latest updates are that the deal is '95% done'. Deadlock on key issues such as competition rules, fisheries, and the policing of the deal could still scupper talks.
GBPUSD Daily chart: the price action suggests investors are growing more confident that an agreement is imminent
Reports that lockdown restrictions could be relaxed soon now that infections have plateaued may be further increasing sterling's appeal. However, it remains to be seen whether this cheery mood will be sustained.