Markets
News that Pfizer and BioNTech’s vaccine is more than 90% effective in preventing symptomatic cases of covid-19 triggered huge moves yesterday. They changed the market narrative. Investors might now use as base case that the current Covid-wave will be followed by mass vaccination rather than by another virus surge once restrictive measures end. European stock markets closed 5% (Germany) to 8.5% (Spain) higher with a clear rotation in favour of sectors like travel. The EuroStoxx 50 tested the July recovery high (3451), but a break didn’t occur. US stocks initially joined the party, but swooned in the final hours of dealings with president-elect Biden warning for a dark winter and NY mayor De Blasio warning for fresh restrictions as a spike in cases threatens the city’s recovery. The big tech companies, who pulled the recovery rally since March, lead the way lower. Main indices set fresh all-time highs before painting dangerous short term reversal patterns on the charts.
Core bonds fell prey to significant profit taking, both in Europe and in the US. The US yield curve bear steepened with yields rising by 2 bps (2-yr) to 10.9 bps (30-yr). The US 10-yr yield reached its highest level since March at 0.97% before retracing somewhat in line with US stock markets. The German yield curve rose by 5 bps (2-yr) to 12.9 bps (30-yr). The higher yields at the front end of the curve hide a dangerous “risk”. If the narrative on the next phase of the Covid-crisis changes (from 3rd wave to vaccination), it will have consequences for monetary and fiscal policy. A return to normal social and economic life reduces the need for both to keep on easing. In that respect, any ECB package at the December meeting could be the final one in the cycle. It implies uncertainty on granted lifelines. The ECB’s guidance on its Pandemic Emergency Purchase Programme for example clearly states that it will terminate purchases once it judges that the COVID-19 crisis phase is over. The new narrative could make it a very tricky road ahead for bonds and stocks after the early optimism fades away.
The dollar profited from the positive risk environment after failed tests of 92.13 support in the trade-weighted greenback (92.96 close) and 1.1881 resistance in EUR/USD (1.1813 close). USD/JPY erased the drop below 104 and recovered to 105.10 currently. Sterling managed to keep track with the dollar, sending EUR/GBP back below 0.90. Sterling slightly adds to gains this morning after the UK House of Lords rejected Boris Johnson’s controversial UK Internal Market bill which gave his government unilateral power to rewrite parts of the EU-UK Withdrawal Agreement. It was one of the EU’s red lines in the final stages of the trade deal negotiation process.
News Headlines
In its twice-yearly Financial Stability Report, the Fed warns for asset prices to take a significant hit should the pandemic’s economic impact worsen in coming months. Especially commercial real estate, where property values have already begun falling, is vulnerable. It also noted the high leverage in non-financial businesses risks triggering defaults in case of prolonged weak profits. The central bank included for the first time also climate change risks.
Chinese CPI inflation slowed dramatically from 1.7% to 0.5% y/y (-0.3% m/m), the lowest since end 2009. Except sluggish core inflation (stable at 0.5% y/y), there was a significant decrease in food inflation, from 7.9% to 2.2% y/y. Pork prices slumped 2.7% y/y or a staggering 7% on a monthly basis amid record imports of and the slow recovery in pig numbers after being decimated by the swine flu decimated last year.
The Armenian PM Pashinyan said he signed an agreement that ends the war with Azerbaijan over the contested territory Nagorno-Karabakh. The news came days after Azerbaijani forces captured an important city in the area. Russia and Azerbaijan also signed the deal, which comes into force immediately.
