Markets
The market is going through the roof! Stocks soar more than 7% in the EMU and 5% on WS. The European open already bode well for risky stocks after Democrat Biden was declared president-elect after winning Pennsylvania. Regardless of Trump ordering recounts, Biden’s lead is large enough in many states to withstand a possible flip of some hundreds or thousands (at best) votes. A Biden presidency comes with an assumed return to multilateralism, which in particular serves the open European economy well. A second jolt came from developments in the vaccine race. The Pfizer vaccine reportedly prevents 90% of the Covid infections in a conducted large study. That’s much more than the expected 60%-70% based on previous vaccine results. Investors for the first time see light at the end of the Covid-tunnel. The encouraging results carry the EuroStoxx50 to its July recovery high near 3451. The S&P500 breaks higher above the downward sloping trendline connecting the September-October-November high. Core bonds came under heavy selling pressure. US Treasuries underperform the German Bund. The US yield curve bear steepens with yields increasing 1.8 bps (2-yr) to a stunning 11.9 bps (30-yr). Both real yields as well as inflation expectations rise with the latter adding a few more bps as markets anticipate the full effects of the large-scale stimulus initiatives. The German yield curve also bear steepens with yields up 9 bps at the very long end. The European periphery tightens forcefully with Greece (-11bps) outperforming.
On FX markets, both the dollar and the euro are in a weak spot, resulting in indecisive, sideways EUR/USD trading in a very thin range. The pair even barely budged on the Pfizer announcement. A poor attempt to take out the 1.19 barrier failed initially though another try is currently yielding a bit more result. EUR/USD is filling bids near 1.1910. The all-in-all poor euro performance is striking given the ebullient sentiment and could be a sign fatigue is kicking. The Swiss franc and Japanese yen are today’s risk-on losers. USD/JPY undid last week’s technical break below 104 (104.87 currently). EUR/JPY tests recent highs just below 125. Notable outperformers on the currency market are export-reliant currencies including the Aussie and Kiwi dollar (both about 1% up to the euro and dollar). The Norwegian krone also performs strongly thanks to a 10% oil price surge. Central European currencies gain with the zloty leading the forint (second) and Czech krone (third). EUR/CZK test important support at 26.5 while EUR/HUF nears the key technical reference at 356/357. The zloty tests similar support at 4.46. Sterling traded silent with EUR/GBP hovering around opening levels of 0.903. The pair did stay above 0.90 for the whole session though, despite the vaccine news. Sterling investors hold a cautious approach as yet another Brexit deadline on Nov 16 approaches.
News Headlines
Several EMU national capitals in recent weeks suggested that they would accept free grants from the European Recovery Fund, but wouldn’t draw on the cheap loans provided by the same fund. The obvious reason is the extremely low yield environment. ECB Mersch today encouraged all member states not to undermine this new European solidarity approach. In his (hawkish) opinion, it would even warrant a reaction by the ECB which cannot give a guarantee for accommodating such obvious circumvention, implying reduced (support via) asset purchases (for some states?).
Brent crude rises by $3/barrel today, from $40 to $43. Apart from the vaccine news (see above), the commodity profits from comments by Saudi Energy Minister bin Salman who suggested that the planned OPEC+ deal on production cuts could be tweaked. OPEC+ normally would start tapering production cuts from the existing 7.7 million barrels per day to 5.7 million bpd from January. Algeria, who holds the presidency, last week suggested to agree a six month extension to the current scheme at the Nov 30-Dec 01 OPEC+ meeting.
