Weighing on risk out of the gates this morning is a touch of vaccine safety uncertainty as some questions need to be answered after news broke that AstraZeneca Plc is likely to conduct an additional global trial to assess the efficacy of its Covid-19 vaccine, according to the company’s CEO.
When it comes to vaccine rollouts, especially emergency use authorisation, vaccine safety and accurate data gathering is the ultimate high bar under the FDA vaccine approval purview.
There is palatable disquiet brewing in market circles as there is bound to be more questions than answers offered up over this vaccine trial setback.
Besides unwelcome vaccine efficacy surprises this morning, many things could easily derail the risk-on party.US President-elect Biden’s ambitions are going to be hampered by a split Congress. The Fed is out of influence; growth stocks are stretched, and the conditions are against value.
At the same time, pre-existing secular economic constraints will bind as the coronavirus case count explosions and the anticipated weak economic data, particularly around jobs, will continue to serve as a reality check to the surge in risk assets.
After a sizzling rally the past fortnight, European equities were slightly weaker overnight after investors hit the optimism pause button ahead of the US Thanksgiving holiday, where markets typically come to a full stop.
And Forex markets were dominated by a bearish tone from the European Central Bank (ECB) October minutes and the still never-ending Brexit saga. Oil markets shifted into a pre-OPEC profit-taking kind of mood, sliding off recent highs compounded by pre US holiday position squaring.
This week’s very encouraging news on AstraZeneca’s Covid-19 vaccine’s efficacy, which points to a significant acceleration of the global vaccine rollout next year, has improved the economic outlook.
Such risk premium compression, higher commodity prices, accelerating inflation expectations, and a weaker US dollar have soothed the runway for a much earlier economic lift-off than the market had expected.
But there are worrying signs that it might not be a long runway. Cross-asset volatility has normalised to well below historical averages, suggesting risk-premium compression will not offer sustained help.
And when the Chinese credit impulse is negative, as it is expected to be in 2021, commodity prices can at best be expected to be flat; weakness is typically more common. Both suggest the correction is coming, and it’s not if but rather when.
Just like mice and men, the best-laid plans of forex traders often go awry. Just as the street was making a good argument to “sell the buck” into year-end, the ECB minutes said, please pull in the bullish Euro reigns.
Dovish headlines from the ECB account of the October meeting, together with a dovish speech from ECB chief economist, seem to be weighing on the euro.
There is now an interesting dynamic between Lane and ECB board member Schnabel, who, earlier this week, gave a decidedly hawkish speech (emphasizing side effects of non-conventional measures and the need to stretch out the ‘medium-term’).
The question will be where ECB President Lagarde comes out in this dispute. I still think it’s a toss-up, but intuitively the market will assume she would be closer to Schnabel than to Lane until the policy has been signalled as actionable.
While I don’t think the long Euro trade is in trouble, it’s just not as bright as it looked yesterday morning, and folks may wait until the month-end clears and the AZ vaccine uncertainty clears before re-engaging any bullish ambitions.
Oil slips ahead of OPEC meeting
Rightly so, the market showed some pre-OPEC nervousness given how quickly oil moved up past $48/b with the tailwind of positive vaccine news and the uncertainty of the US elections (mostly) behind us.
The vaccine is not even rolled out, and the market is already looking to a moonshot. But as we have seen from the latest efficacy concerns around the AZ candidate, it should prove a stark reminder that oil markets still have to deal with a bumpy runway during the northern hemisphere winter to bridge the hope gap and eventual vaccine lift off.
I remain optimistic about medium-term prospects for oil, with demand gradually recovering and the impact of underinvestment in new supply likely to become more of a concern as the global economy returns to normal.
However, I think the minor correction is a good example of the short-term sentiment risks that lie in wait. A positive outcome from next week’s OPEC+ meeting is priced in, but the vaccine tailwind and oil rally in recent weeks could make it more difficult to build support for the extension of OPEC+ cuts.
An extension is still the default outcome, but confirmation of the consensus view will not be an incremental positive, and a failure to extend cuts would be taken badly. Let’s just hope the vaccine tailwinds don’t become headwinds as the last thing the oil market needs to re-board the WTI rollercoaster.
Equity and Oil market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi