A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
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Andrew Kositkun Foreign Exchange Head Trader
The broad dollar remains under pressure and should continue to test multiyear lows due to a lack of catalysts to weaken and reverse the current bearish trend.
The resilience in global economic data and supportive fiscal and monetary policies have helped risk assets move higher, while vaccine developments have eliminated downside tail risks from the virus. Over the short term, event risks come through central bank meetings, the EU summit, Brexit developments and any disappointments with U.S. fiscal stimulus talks. However, given the strength of the recent rally, any negative developments should trigger increased volatility but shouldn’t reverse the risk-on rally.
Notably, equity markets outside the U.S. have been marginally outperforming the S&P 500, helping other currencies against the U.S. dollar. With markets bullish on emerging market equities, foreign inflows into these countries should continue and give further scope for equity-sensitive currencies to continue their catch-up rally.
Commodity prices have also rallied, with oil’s outperformance a particular focus. After a delay, OPEC+ finally agreed on a compromise deal that allows for a gradual easing of production cuts less than originally planned. This production agreement and expectations for a continued global recovery support oil prices and oil-sensitive currencies, including the Canadian dollar and the Norwegian krone, among others.
On the stimulus front, increased expectations for a small fiscal package in the U.S. has also helped the recent bounce in risk. Nevertheless, it still remains unclear if a fiscal compromise can be reached before Christmas. Congress also needs to pass funding for the government by Dec. 11, and investors will be watching for whether needed COVID-19 assistance program funding will be part of this package.
Many headwinds remain, and there is still a long road between now and when mass vaccination is achieved. The constructive global narrative remains very much intact. However, even without mass inoculation, vaccine progress should blunt negative market reaction to COVID-19 spikes, as eventual vaccine availability will make data pullbacks shallower than previously expected due to Western economies reaching population immunity faster than forecasted. As a result, central banks should remain accommodative with their settings and guidance due to elevated uncertainty, but expect the bar for dovish innovation to be high due to the improved outlook.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Earlier in the session, the British pound was down the most it had been in three months, as negative headlines out over the weekend put a Brexit deal in question, but subsequently recovered more than half of its losses. In reality, volatility this week was always expected given the sharp run-up in the pound and proximity to this week’s EU summit that is seen as the deal deadline. The question now is whether or not all of this last-minute brinksmanship is just making noise for the benefit of each side’s respective domestic audience to make selling an eventual deal easier. The belief is that a deal still gets done, but it will be a bumpy ride from here to a deal.
News reports indicate that a deal to avoid a government shutdown in the U.S. on Dec. 11 is almost at hand, with additional fiscal stimulus measures being attached to the bill. However, nothing is ever easy, and the usual sticking points remain, such as the amount of state and local aid. With the U.S. economy showing signs of softness, pressure has increased on Congress to act. Notably, emergency unemployment benefits will expire at the end of the month without further congressional action. To this point, details of the $908 billion relief bill are expected today as negotiators attempt to settle on language that will be acceptable to both sides.
Japan’s stimulus package should be worth around 73.6 trillion yen, but details matter. As such, the amount of “new stimulus” will likely disappoint the markets.
The White House is reportedly preparing a new list of sanctions against 12 Chinese individuals for their roles in recent issues surrounding Hong Kong. In response, Chinese officials warned of countermeasures should the U.S. continue down the “wrong path.” Markets have shrugged off recent U.S.–China rhetoric and are likely to continue to do so. On the data front, Chinese exports rose 21.1% year over year against expectations for a 12% increase. Conversely, imports fell, as China posted a record monthly trade surplus.
COVID-19 inoculations begin in the U.K. tomorrow, with the U.S. possibly giving the vaccine shot this Friday should the FDA give emergency-use approval on Thursday.
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