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Written by: Craig Erlam | OANDA Europe
The end of a pretty cautious week in the markets, despite getting more positive news on the vaccine front as investors take a breather following a pretty fanstastic couple of weeks.
Moderna followed Pfizer at the start of the week in announcing results from its late-stage trials, before the latter provided an update with improved efficacy on the initial findings. This was followed later in the week by Oxford/AstraZeneca providing an update of its own that was extremely encouraging and should precede some excellent results in a few weeks.
But it seems markets heavily priced in these findings after the Pfizer announcement last week, allowing for attention this week to turn to more pressing matters. Most notably the rapid spread of Covid-19 across Europe and the US, with the latter imposing more restrictions as the daily fatality rate closes rapidly in on the March peak.
Now is the time to act and with lawmakers on Capitol Hill having failed to pass a package prior to the election, it looks like the Fed is once again going to be left to do the heavy lifting in the near-term. Even if talks have resumed, the last few months has highlighted the lack of urgency that exists so I'm not hopeful of an agreement any time soon.
The battels are set to continue in Washington over a stimulus package as the country sees record cases and the number of fatalities fast approaches the peak from earlier this year. Restrictions are appearing across the country once more which means the urgency to agree another stimulus package has just ramped up a fair few notches.
A bizarre spat between the Treasury and the Fed is hardly inspiring confidence in the markets at a time when the potential for turmoil is potentially heightened as the second Covid wave tears across the US. Not only is the Fed not in agreement with the Treasury regarding the necessity of those funds to remain in place, it believes they should remain where they are for longer than initially envisaged to enable proper market functioning in these potentially turbulent times.
It's not just in the US where a battle for cash is happening. Poland and Hungary have set themselves on a collision course with Brussels, vetoing the next seven year budget that was negotiated to include pandemic aid for those countries hit hardest by Covid-19 using funds raised by the European Commission. It was a landmark decision to agree on an aid package of this size raised through a shared debt issuance but, as always with the EU, it's proved to not be as straight forward as you'd hope.
The decision to veto a budget you ultimately benefit greatly from financially may seem a strange move but as we've seen so often in recent years, political and financial motivations are not always aligned and politics can often take precedence. In cutting off their nose to spite their face, they're hoping the urgency of the pandemic aid will force Brussels to soften its position on rule of law but they may not have the leverage they think. Time will tell, but the longer this goes on, the more uncertainty it creates which may be a drag on European markets.
Oil pushing major resistance
Oil prices are once again pushing against major resistance but, as yet, failing to gather any momentum at the right time. WTI is sitting around $42 and Brent $44.50, right at the upper end of the range but once again they've failed to hold on slightly above here and pulled back. A breakout still looks more likely than not but it's not giving way easily.
The vaccine news has been a gamechanger for the outlook. No longer is OPEC+ the only major upside risk and, in fact, the group may decide that further modifications are no longer warranted if prices manage to break to the upside ahead of the meeting on 17 December. If WTI could even break $45 before then, it may be hard to get the whole group on board with any significant tweaks unless they see an opportunity to push prices above $50 and provide a buffer.
Can gold avoid a break lower?
Gold continues to languish around its lows, piling pressure on the $1,850-1,860 support region that's been so reliable over the last few months. It's looking very vulnerable all of a sudden, with positive vaccine news having become a major downside risk for the yellow metal.
This is despite yields having given up the vaccine gains to trade back around pre-election levels and the dollar slumping around its lows as a result. It should be an interesting few weeks for gold which for much of this year has been driven by the greenback and aligned itself with positive risk appetite. Both of those relationships look fractured suddenly and instead it exists in a perennial state of fear of the vaccine.
Should $1,850 fall, we could see a rapid move back towards $1,800, with any stops below current support likely accelerating any downside initially.
How long until bitcoin hits new high?
New highs in bitcoin looks basically inevitable at this point. In fact, I'm a little surprised they haven't hit them already. It's been two days since it came close to $1,850. Dragging its feet a little, by its own standards. Given how the last month has gone and the hype that's back with a bang, you can only imagine where it will go next if new highs are made. $25,000? Maybe $30,000 by year-end? The euphoria is back and while the ride to the top may be fun, the bit that follows has historically shown to be quite the opposite. No doubt it will be an interest end to the year for the crypto community.
Related: Diminishing Returns: The Vaccine Inspired Rally Grinds To a Halt