It never seems to fail as there is always some ‘Ghost of Christmas Past’ lurking in the closet, only this year it has morphed into a mutant form of the Covid-19 virus. The end of 2020 cannot get here soon enough!!

Despite some encouraging news on the US stimulus front as US lawmakers look set to toast the celebratory inking of stimulus deal, Asia investors are waking up to a currency market air pocket as the British Pound and the Euro sell in early trade as a mutant strain of the virus is about to throw a chilling wet blanket over the holiday season in Europe.

While the Aussie slipped amid new restrictions in Sydney due to yet another cluster outbreak.

Still, with no US stimulus deal tabled yet and more lockdowns looming, the market is bound to get off to a rocky start this morning. Indeed, back to the old Monday morning Covid-19 headline reel knockdown.

The risk is growing for significantly extended lockdowns in several countries. There is a gap to be bridged between now and when experts expect herd immunity – in the middle of Q2 at the earliest.

Recent experience has shown that mini lockdowns or circuit breakers do not achieve lasting control of spike cases. It is becoming increasingly likely that we will see extended and severe lockdowns for the majority of Q1.

That is not necessarily priced in. Considering that, even with a risk-on leg on positive Brexit and US fiscal news is possible, it could be followed by a turnaround as Q1 as more intense lockdowns wash out the ‘reflation trade.’

Stimulus package still missing

Fiscal relief cannot come soon enough as this week’s holiday-shortened data docket looks to be filled to the brim with Covid-19 gnarly and will likely get compounded by further signs of a slowdown in the US economic recovery.

With the US Fed updating its forward guidance on asset purchases last week and set expectations for monetary policy accommodation in the near term, the contours of the latest fiscal package will have important implications to allow markets to glide smoother into the New Year despite the numerous air pockets on the radar due to rising Covid-19 concerns.

Still, the fear here is that investors could react in “a day late, a dollar short” fashion to any stimulus deal, especially with both the US employment situation and Covid-19, spread shackling the economy due to a state of lockdown siege suggesting Congress needs to do much more, especially with the UK lockdown headlines playing a major factor worrying investors which country is next to get hit with the mutant strain.

Moderna vaccine roll-out

The US will soon roll out the Moderna vaccine, which will support the game-changing panacea thesis and should continue to provide downside inoculation to overall market risk sentiment, given the horizon looks rosy with the world in chorus screaming out, “Dear Future, I’m now ready.”

Meanwhile, the vaccine narrative has such a long runway for catalyst evolution through the end of 2021 that as consensus as it may already be, it is difficult for prices to have fully reflected it all this far in advance.

US dollar attracts safe-haven demand

The US dollar has attracted safe-haven demand in the thinly traded Asia morning market. But since we are miles away from a reflation trade washout or even a Brexit pancake, traders could view this as a good level to sell the dollar.

The US dollar is overvalued after a long stretch of US exceptionalism asset market outperformance. The Fed rate cuts have eroded the US dollar carry advantage central bank’s new average inflation targeting framework should keep (real and nominal) interest rates low for several years.

Simultaneously, a recovering global economy should weigh on the “safe-haven” Dollar through various channels. But due to lockdown fears, we are seeing a small challenge to the global economic recovery view this morning.

Oil markets

Oil traded higher Friday, back to February’s levels at least for the front month, and posted a seventh weekly gain. The latest advance came on Moderna Inc., reporting its Covid-19 vaccine is highly effective against the virus, and according to Dr. Fauci, it will be distributed soon.

It is a very odd oil market rally as higher prompt prices usually require higher oil demand, which is limited. I think this is a case of copper smiling back in the rear-view mirror, saying, “come catch me if you can.”

The primary source of bullish price action has to be investors rotating into cyclical commodities such as oil, the prospects of an increasingly weaker dollar, and all the bullishness around a US stimulus deal.

We should expect a small washout today as all those bullish synergies around reflation and a weaker US dollar are reversing a touch with the latest chaos in the UK on the back of the mutant strain of the virus.

International market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi