Market Optimism Flowing Once Again

Written by: Craig Erlam | OANDA Europe

That good feeling is back in the markets after we saw some end of month profit taking on Monday, with Europe seeing gains of more than 1% and Wall Street eyeing a similar open.

The last month was massive for the markets. One major risk event removed and three vaccines that allows everyone to imagine life after Covid. The optimism fizzled out a little into the end of the month but importantly, there was no major correction of the early November surge. This wasn't a rally gone too far, just one in need of a rest.

Whether that optimism can continue into the end of the year is another thing. A lot of good news is now priced in and many countries are navigating through a complex second wave of Covid-19, some with more success that others. Operation save Christmas - and obviously ease rapidly growing pressure on health systems - appears to working, although many regions will continue to see pretty harsh restrictions.

The US Thanksgiving holiday may offer some insight into the kinds of surges we can expect over the holiday period and people travel around and spend time with family. January and February may be very challenging once again, although it will be made slightly easier by the knowledge that we're almost at the finish line. And should vaccination programs be successful, less pressure on health systems may mean less strict measures. Here's hoping!

This morning has seen a flurry of tier three data from across Europe, with the manufacturing PMIs the most notable of these. The strong performance in manufacturing compared to services has been a positive this last month but it remains a much smaller component of the economy, particularly in the UK, so the overall benefit is small.

The UK manufacturing PMI may also have painted a slightly false picture, with a certain amount of the increase coming from stockpiling as the country prepares to leave the transition period, perhaps without a deal meaning trade friction and tariffs in the near-term. Still, the sector has had a much better lockdown this time around across Europe, with it facing fewer restrictions than earlier this year.

The euro area PMI is still looking good, although outside of Germany we are seeing some softening in the data. As ever, Germany is the star pupil having managed the pandemic well to date and the data is continuing to reap the rewards. The country may not quite be seeing the turnaround yet that others are but it has also been far less impacted. Unemployment ticked lower in another encouraging sign for the regions largest economy.

OPEC talks pushed back but prices remain elevated

Oil prices are pulling back a little, as OPEC and its allies struggle to find agreement on production targets for next year. The dispute comes as many countries combat a second wave of Covid-19, forcing severe restrictions and another hit to air travel. 

Oil prices have rebounded strongly over the course of the last month as three vaccine announcements paved the way for an economic recovery next year. But also built into the recovery trade has been the expectation that OPEC+ will push back plans to increase production by two million barrels in January.

Those plans were made with prior forecasts in mind that haven't come to pass. Complicating the issue though is the significant buffer that the vaccine news has afforded producers which may be the cause of the dispute. 

If producers push ahead as planned, will the pull back leave crude prices at manageable levels. Will any delay offer an advantage to the US shale industry and push back tough decisions by a few months? A compromise may be needed by a simple postponement may be too much to ask at this point.

Gold enjoys temporary reprieve

Gold is finally enjoying some reprieve after finding some support just ahead of the $1,750-1,760 region, which coincides with the highs of late spring/early summer. The level coincided with the 50% fib level from the pandemic lows to highs and may be responsible for the sudden surge in buying interest. It may also be a little premature.

It's been an impressive rebound today, with the price climbing back above $1,800 in the process. But there are some major obstancles ahead and I'm not convinced it has the stomach for the fight at the moment. I think the rally may well face significant counter-pressure in the near-term, particularly around $1,850, should it get that far.

Still, it is encouraging for gold. The $1,690-$1,760 region is big for the yellow metal and could be a major test of its bullish prospects over the medium term. I think this area will be tested a little more before it has a proper run higher, with another flurry of stimulus this month potentially being the catalyst for such a move. 

Bitcoin continues to flirt with $20,000

Bitcoin hit fresh highs today but has once again retreated ahead of the psychologically significant $20,000 level. I think the rally could kick into a higher gear if this level is overcome, likely lifting the rest of the space with it. Interest is only going to increase as we dive deeper into record territory which has historically been very positive in the near-term for prices. 

Whether that is fundamentally warranted though is another thing and the more aggressive the rally, the more of a concern it becomes. It has a history of coming down in flames after hype-driven surges. There's nothing to suggest that wouldn't happen again.


Related: A Chilled End to Bumper November for Investors