With massive fiscal stimulus, which was expected to accompany a blue wave, no longer expected, the evolution of COVID-19 infection curves should play a critical role in determining the near-term market narrative.
The Pfizer and Moderna vaccines, which appear to be more than 90% and 94% effective in stopping SARS-CoV-2 infections, respectively, have given a boost to risk markets, as a higher than expected efficacy implies that the global economy could return to pre-pandemic levels earlier than expected. However, the initial pop in positive sentiment quickly stalled, as more activity restrictions are likely, due to the continued uptick in COVID-19 infection numbers, especially in Europe and the U.S.
In essence, markets have been served a reminder that economic activity will not return to normal in the near term even if more efficacious vaccines will help promote a return to normalcy over the medium term. As we have written in past commentaries, countries that are best able to control the spread of the virus are the ones most likely to outperform economically. Economic divergence should also be driven by countries’ different access to the vaccine. Additionally, it is possible that markets are concerned that vaccine-driven optimism could delay needed fiscal stimulus, as lawmakers could have a reduced sense of urgency.
In the near term, the U.S. dollar is likely to remain stable due to safe haven demand and U.S. economic outperformance. The U.S. economy has continued to recover, even with high COVID-19 case numbers, as the risk of widespread lockdowns likely remains low. However, increased localized restrictions remain likely. Hospitalizations are at a record high but are geographically dispersed, which should help reduce the chances of blanket restrictions. Given this, markets continue to track virus developments. Should U.S. numbers continue to worsen, expect non–U.S. dollar reserve currencies to be better supported.
Over the medium term, scope remains for risk-sensitive currencies to rally under a more constructive global backdrop. In the developed markets, the British pound remains of interest. While a skinny Brexit deal remains the base case, Thursday’s videoconference of EU leaders remains important, as any deal needs to pass a full plenary vote in the EU parliament. This makes Dec. 16, the last scheduled plenary of the EU parliament, another important date. For the U.K., the country would likely require three weeks to ratify any deal. In the same vein of an improving global backdrop, expect high-yielding emerging market currencies to continue to outperform. | |
| HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: | |
- Former Fed Chair Janet Yellen appears to be a serious contender to be President-Elect Joe Biden’s Treasury Secretary. The nomination of a highly qualified candidate such as Yellen or Lael Brainard should be a market positive, albeit not a major market-moving event.
- The complicated U.K. political landscape has grown more complicated, with several members of Parliament and Prime Minister Boris Johnson in isolation due to a COVID-19 outbreak. This likely means a delay in Prime Minister Johnson’s planned overhaul due to recent cabinet resignations.
- Fifteen Asian countries have signed the Regional Comprehensive Economic Partnership (RCEP) after decades of negotiations. This deal, which initially included the U.S., will include China, Japan and Korea as well as Association of Southeast Asian Nations countries and the Antipodeans. Notably, India is not a part of the trade deal. Even without the U.S. and India, the RCEP will be the world’s largest trade deal and will reduce tariffs, strengthen supply and strengthen supply chains. According to estimates, the RCEP pact should add $200 billion to global GDP.
- Japan and China reported positive economic data. In Japan, third-quarter GDP increased 21.4% on a seasonally adjusted basis against estimates for an 18.9% increase. While a positive, Japan has only recovered roughly half of its lost output from the pandemic, as its recovery lags other developed economies. In China, industrial production rose 6.9% year over year, beating estimates for a 6.7% increase. Demand from the Chinese private sector stood out and continues the broader trend of moving the Chinese economy away from exports and toward domestic consumption. Conversely, Chinese retail sales increased 4.3% year over year. While this latest print missed estimates, it still represented an increase over September’s number.
- News reports indicate that President Trump plans several new moves against China this week. These actions could include measures to protect U.S. tech from China’s military and increased sanctions against Chinese officials.
- Political turmoil in Peru deepened, as interim leader Manuel Merion resigned just six days following protests stemming from the impeachment of Merion’s predecessor. Lawmakers have rejected a bid from Rocio Silva to form a new government, leaving Peru without a head of state. Francisco Sagasti is scheduled to be considered today.
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