Investors Full of Optimism
A more muted session on Wednesday, which is likely to continue as the US and others observe Veterans Day and markets settle after a vaccine boost in recent days.
The vaccine news feels like a real game-changer for these markets. The first time in months that optimism is driven by the prospect of permanent economic reopenings and a return to normality, as opposed to emergency stimulus measures and a booming pandemic-proof tech sector. It's far healthier for these markets in the long term.
I don't want to get too carried away, huge hurdles remain, not least final approval for the vaccine once all of the data is properly analysed. But the recent development was really significant. The last few days has felt like an enormous rush of relief through the markets rather the usual FOMO surge.
With other vaccine candidates in late-stage trials, more good news could follow in the final weeks of the year which could ensure that these markets end of a high. It's far too early to throw terms like Santa rally around but December may be a very good month if certain things fall into place as they very well could.
The markets may have completely ignored President Donald Trump's attempts to claw back the election but until the result is confirmed, this poses a potential downside risk. Not the prospect of Trump returning for a second term, of course, the markets did very well under his leadership, but the prospect of a long-drawn out process that leaves the US effectively leaderless come January.
The prospect of more fiscal aid looks far off, with Mitch McConnell viewing the latest labour market report as evidence that the economy is doing much better. That may not be the case in another month or so as the latest surge weighs on the economy and potentially enforces restrictions but either way, a package of any kind isn't looking likely soon. Potentially another upside surprise later in the year but I'm not banking on it.
The interesting one will be the Federal Reserve. The lack of fiscal stimulus has left many thinking more easing in December is basically a foregone conclusion, especially with Covid tearing across the US once again as we head into the winter. But more positive vaccine news and stable financial markets may encourage them to hold off. I don't think that would be the best idea and I expect they will ease, but it may not be the foregone conclusion many expect.
Other central banks aren't wasting any time. The RBNZ became the latest to ease monetary policy this morning, announcing a new funding for lending scheme aimed at reducing funding costs and lower rates but refrained from cutting the benchmark rate into negative territory. They joined the RBA and BoE last week and it's widely expected the ECB and Fed won't be far behind, equiped with fresh economic projections next month.
All of these are potential bullish factors for markets heading into year-end. Of course, I'm not forgetting the biggest downside risk of all. Winter has come early, Europe is in lockdown, the US may not be far behind in adding restrictions. Perhaps the work of the various policy makers earlier this year is putting investors minds at ease but this wave could be much worse so it remains a signficant downside risk for the markets.
Brexit updates have been few and far between the last few weeks - which has made me more confident that a deal will be reached, not less - and reports this morning suggested EU diplimats expect a deal to be presented in the middle of next week. That would be a massive achievement for both sides and come as a huge relief given the obvious risk of adding no-deal Brexit to everything on 1st January.
Oil hits two month high on timely production hints
Oil prices are flying; the euphoria of the vaccine news combined with the prospect of slower production increases has sent crude prices to more than two month highs. The vaccine news is obviously massive here and could really shift the dial on the demand side next year. The timing of Saudi Energy Minister Abdulaziz bin Salman's comments just further fueled the buying frenzy.
His suggestion that the OPEC+ deal could be tweaked "even beyond what the so-called analysts are talking about" has got traders excited. A near-term supply adjustment and improved longer-term demand prospects is just what crude prices needed and further vaccine news in the coming weeks could propel them further. The obvious downside risk being a severe winter Covid surge and OPEC+ not following through on these hints.
It will now be interesting to see how Brent and WTI trade around $44 and $42, respectively, from the upside. Should they find support here, that would be a very bullish signal. To the upside, the next big test will come around $47 (Brent) and $44 (WTI).
Gold sees increasing near-term downside risks
Gold enjoyed some mild reprieve yesterday but continues to hover near its three month lows. Higher yields in the US is continuing to provide some support for the dollar which, in turn, is keeping gold prices under pressure. The key area remains $1,850-1,860 and it's looking very vulnerable in the near-term. More vaccine good news in the coming weeks is a big threat to that level.
Beyond that, I continue to think the longer term prospects for gold are bullish, the road to recovery will take time and require more central bank and government support. But given the reaction we've seen to vaccine news in recent days, the immediate downside risks for gold have undoubtedly increased.