Markets
Equities made a small step backward yesterday after the announcement of successful vaccine trials by drug maker Moderna pushed the likes of the S&P and the Dow to record levels. The move in the first place can be considered as a correction/profit taking after the recent sharp rise due to positive vaccine headlines. However, the short-term rise in Covid infections, in Europe but also in the US clearly complicates the eco picture for the fourth quarter of this year and early next year, especially as the prospect for additional fiscal stimulus remains uncertain. US eco data were mixed, but markets mostly focused on disappointing US October retail sales, a potential harbinger of the negative impact of the rise in infections on activity short-term. US equities closed with modest losses of 0.21% (Nasdaq) to 0.56% (Dow). US yields’ decline accelerated. Fed Chair Powel also acknowledged downside risks of the current rise in infections and reiterated his commitment to the support the economy. ECB’s Lagarde also downplayed that the news on a vaccine would be a gamechanger for the economy short-term. CB comments gave further comfort to bond investors. The US yield curve full flattened with yields declining between 0.8 bps (2y) and 5.7 bps (30-y). German yields showed a similar trend but less outspoken, with the 2-y unchanged and the 30-y yield declining 2.2 bps. The dollar again didn’t profit from the softer risk sentiment. EUR/USD closed even marginally higher 1.1862. USD/JPY further extended the decline from Monday’s 105+ levels (close 104.20). Sterling profited only modestly from persistent headlines/rumours that a Brexit deal might be possible in the near future (EUR/GBP close at 0.8955).
Asian equities also show a mixed picture this morning. Japanese trade balance data were better than expected, supported by a better export performance. However, the stronger yen is a drag for Japanese equities (Nikkei -1.1%). USD/JPY is extensively testing the 104 big figure. The yuan also continues is gradual strengthening trend (USD/CNY 6.55). Moves in the other major USD cross rates are limited , but the picture for the US currency still looks fragile with EUR/USD trading near 1.1870 and the DXY trade-weighted USD index at 92.35. US yields continue to drift lower.
Today’s eco data probably will only be of intraday significance for trading with US housing starts and permits expected to confirm the positive dynamics in this part of the economy. Later this evening, the US Treasury will sell $27 bln of 20-y bonds. Fed Williams and Bullard are scheduled to speak. On the bond markets, yields are further declining from the ‘post-vaccine peak levels’ reached early last week. The dollar still doesn’t convince even as the market assessment on the potential positive impact of vaccines is turning more guarded. EUR/USD 1.1881/1.1920 is an important ST resistance area. The risk-rally shifting into a lower gear in theory isn’t that negative for the dollar. Even so, it didn’t help the US currency much of late. A break of that 1.19 area would open the way to the 1.2011 year top. For sterling, we continue to monitor headlines on the progress on Brexit deal. At least over the previous days, sterling showed no Brexit-euphoria. In line with other central bankers, BoE members, including BoE’s Bailey, recently advocated caution on the positive effects of a vaccine for the economy.
News Headlines
Judy Shelton’s nomination to the Federal Reserve Board was blocked in the Senate yesterday in a 50-47 vote against after Republican defections and absences. Shelton caused controversy with her ultra-hawkish views which she later abandoned, calling for rate cut to align herself with Trump. It could come to new vote later this week. The calendar in any case is tight with a holiday scheduled next week after which one Republican will be replaced by a Democrat.
Bulgaria vetoed North Macedonia from progressing towards EU membership, saying it isn’t ready at the moment. The move is a blow to the EU’s enlargement strategy in the western Balkans to counter Russian and Chinese influence. Relations between the two have soured since the early nineties over history, identity and language.
