Diminishing Returns: The Vaccine Inspired Rally Grinds To a Halt

Written by: Craig Erlam | OANDA Europe

European stock markets are around 1% lower on Thursday, with Wall Street positioning for losses of roughly 0.5% on the open as the vaccine inspired rally grinds to a halt.

We've seen diminishing returns over the course of this week, with Moderna only generating a modest response on Monday and the Oxford update this morning getting no love at all. These are all hugely important developments but the reality is that the reaction to the Pfizer announcement was probably also an acknowledgement that these wouldn't be far behind. In other words, they've been largely priced in ahead of time.

The results have so far been hugely impressive and there's a lot of optimism that the stage three trial analysis from AstraZeneca/Oxford in a few weeks will be very encouraging. But that doesn't mean it will lift the mood in the broader markets because we've been talking about these announcements coming before the end of the year for months and the relief came last week.

What's more, we're currently seeing record daily cases and deaths as we navigate through a brutal second wave that has forced more nationwide lockdowns and restrictions. And while governments will be hoping the restrictions quickly pay dividends, it is unlikely to be that straightforward which means a lot more pain lies ahead. That could take the edge of this improved sentiment in the near-term.

There's no real sign that we're going to see recent gains unwound even as Covid wreaks havoc once again. It seems to have become accepted that this is going to be the case and all of these successful vaccine candidates now means there's an end in sight. Naturally it helps that central banks are doing their bit to shore up confidence while governments are putting the support measures in place to keep unemployment down in the interim. 

And central banks are going to remain active in the months ahead, with the Fed and ECB both expected to add more stimulus in December which could contribute to a strong end to the year for equity markets. The obvious downside risk being the winter being far more devastating than anticipated, on the Covid side. 

CBRT goes above and beyond

It's not often that a central bank governor being sacked and finance minister resigning on the same day is viewed positively but that was very much the case a couple of weeks ago and for good reason, it seems. The currency had spiralled out of control, hitting new record lows on a daily basis and stealth tightening measures were doing nothing to slow the move. Something had to change and it has.

The moves in the markets showed that a change of approach was expected and the central bank has gone further than expected today/ While the weekly repo, overnight lending and borrowing rates increased by 4.75% to 15%, 16.5% and 13.5%, respectively - in line with expectations - the late liquidity window rate rose more than expected to 19.5%. It seems the central bank is finally determined to deal with the currency and inflation issues head on rather than try and be clever in the interest of politics.

Barnier spurs Brexit deal optimism 

There isn't a huge amount to catch up on, with regards to Brexit, the only notable development being Michel Barniers decision to cancel EU briefings today, a sign perhaps that the two sides are inching closer to a deal and there may be a more substantial update to provide shortly. 

The pound jumped a little on the news but continues to tradee a little lower on the day against the dollar, and flat against the euro and yen. As I've repeatedly said, it's incomprehensible to me the idea that these talks could collapse at this late stage and the way the markets are positioned, I'm not the only one. A deal will probably spark a temporary relief rally in the pound but that may be short-lived and profit taking may quickly kick in. This is largely priced in now. The major risk lies below if the unthinkable happens.

Oil loving the vaccine updates

Oil prices are coming off a little again today after once again failing to hold above post-summer range highs. For WTI, this is around $42, in Brent around $44.50. On a couple of occasions in recent weeks, crude has broken through those levels but each time we've seen a reversal the same day and it's just struggling to hold on.

Momentum remains very much with the bulls after an impressive November but it's really struggling to break out from the areas it's traded for most of the last six months. Should it manage to hold above these levels, it may pick up added momentum but the failure on multiple occasions now may trigger some more profit taking, as traders lose hope that it can fully capitalize on all of the vaccine news.

Gold coming under considerable strain

Gold is continuing to struggle and small gains in the dollar today is putting it under increasing pressure. This is despite the fact that yields have corrected themselves after the initial Pfizer spike which has left the dollar lingering around its lows of the last four months. 

The near-term outlook isn't great for gold and once again, support around $1,850-1,860 is coming under considerable strain. It looks only a matter of time until it gives way, at which point stops alone may trigger an acceleration of the sell-off, bringing $1,800 quickly into focus.

Is this time different for bitcoin?

Bitcoin is having a relatively dull day by its own standards. A 4% daily swing and flat on the day at the time of writing, not that this will last. It seems cryptomania is alive and kicking, with bitcoin as ever reaping the rewards. A modest 55% rally over the last month, up more than 350% from its March low and, lets face it, would anyone be surprised if it doubles again before year end. 

Not to be outdone by Tesla, bitcoin has gone wild one again. The hype is back which naturally makes me more than a little nervous. It didn't end well last time and while enthusiasts may be queueing up to tell me why this time it's different, it very rarely ever is. This can and probably will go a lot further but that will only make the fall all the more painful. Strap yourselves in, it's going to be a wild ride.

Related: The Market Seems Primed for a Brief Pause