Asia market: Infection rates and lockdowns remain primary market focus

Market highlights 

• Rising infection rates and lockdown concerns are once again the market's primary focus.

• Oil had been shrugging off mixed API and DOE figures to focus on the positives before getting sucked back into the Covid-19 doom loop.

• News of another vaccine is most welcome, but is intuitively negative for bullion prices.

• Clearer signs that crypto is becoming a viable emerging asset class.

Markets

US equities were weaker again Wednesday, the S&P down half a percent heading into the close. Once again, rising infection rates and lockdown concerns are the market's primary focus. And in what could be a foreshadow of more wide-sweeping public health measures needed to combat the spread of Covid-19, in the US, New York City (NYC) schools announced a halt to in-person instruction starting Thursday.

This looks very likely to impact the local labor market negatively and, predictably, the US stock market has reacted extremely negatively, as traders cut and trim while hedging against this necessarily health care move could be the trigger that sends both the market and the economy back into the Covid-19 doom loop.  

It’s not just the soft lockdown that hurts sentiment, it's the pernicious influence the virus has over how we live our lives and integrate with the society that becomes the great unknowns for the market. Sure, we shop more online, but the downstream impact on the big city job market, especially huge US urban centers, is likely irreparable, and for that the vaccine cannot provide a cure. 

At least 1,707 new Covid-19 deaths were reported Tuesday, according to data from Johns Hopkins University. That’s the highest daily death toll since May 14 and suggests the US is losing the war on Covid. If you’re alarmed at the sound of the current death knell (1700 today), two or three weeks from now it could easily be 3000 or more, given the statistical lag, which is a horrible thought and will weigh on year-end positioning.

Investors were already getting keen to mitigate year risk to protect gains early in the week, knowing that 2020/21 is still likely to be a tough period for northern hemisphere economies, as evidenced by soaring US coronavirus case counts and new pre-NYC virus containment measures in Washington, California and Pennsylvania.

Year-end risk reduction was stamped all over the market yesterday. Despite more excellent vaccine news, there’s only been a speedy pop up in risk; it was barely noticeable in fixed income and equities. Investors are becoming more fearful of the economic damage already done and what will be exerted while waiting for the vaccine rollout.

One can only imagine how far this sell-off could have run without multiple vaccines in the pipeline. And while the vaccine does offer bright lights at the end of the tunnel, the tunnel just got longer and more cavernous. 

Regardless of what positive input there is, be it a vaccine or a flattening of the curve, it seems like we always have a "short-clock " to work with, given the omnipresent Covid nasties. Yup, some days you feel like the king of the market and the offside bullish court jester on days like today. Fortunately, I reminded myself of this yesterday and wiped the slate clean of any bullish risk. 

Oil Markets

For most of the session, oil prices had shrugged off the mixed API and DOE figures to focus on positive Chinese import data instead – that was until the Covid-19 doom loop struck again when NYC halted in-person instruction.

And with virtually every US state's Covid curve heading in the wrong direction, and a dozen or so densely populated major urban centers and states extremely peaky, traders are forced to hedge the downside risk as it could be a matter of time before political pressure gives in to shutting down the whole holiday season. 

As cases surge across the US, more public schools and universities are currently plotting a defensive course of action. Decision makers will be road-mapping what their next defensive healthcare measures should look like, especially following a holiday season most medial experts fear will further fuel the virus's rampant spread.

Currency Markets

The Ringgit

I expect to see a pullback in the ringgit today on the back of weaker global risk sentiment after the NYC schools news. Not great news for the ringgit is that oil prices slip as traders need to hedge against falling back into the Covid-19 doom loop and where traders may start to write off the whole holiday season.

The Yen

Outside of the JPY, which is being consumed as one of the few viable hedges left for the market to digest, the FX markets treaded water overnight. Still, the street is relatively short dollars and nowhere near hedged short enough on the VIX, so I think the dollar will be in demand for safe have purposes.

The Euro

EURUSD strength can be mainly attributed to USD weakness rather than EUR strength, so with risk losing traction the Euro could look to move lower.

Gold Markets

Gold is under pressure as more good news in the form of vaccine developments hit the wires. There was no "panic" behind last week's sell-off; it was a clear transfer of ownership from weak hands to strong, which remains the case. However, gold traders will need to be on the lookout for safe-haven US dollar demand.

There are some green shoots from the physical side of the street:

• The Singapore Gold Exchange discount has narrowed, touching $13 against London, which is the lowest since mid-June.

• Gold demand in Thailand is notable and can be a good bellwether of a Chinese market recovery.

• Strategic gold longs are reluctant to cut at current levels, and fast money is reluctant to instigate fresh shorts as the macro/stimulus story has not changed. 

However, I don’t think your non-typical gold investors – a huge component of the enduring gold rally – are comfortable being speculatively long gold with more vaccines in the pipeline, based on ETF's continued bleeding holdings which are down 1.4 mn oz. 

In sum, physical provides temporary support, but we need a reversal of ETF flows (and for crypto to run out of steam) for gold to recover towards 1900.

News of another vaccine is most welcome, but is intuitively negative for bullion prices. Moderna's report suggests that other vaccine candidates could elicit a similar degree of efficacy and have the same intuitive result on gold prices. Yields will surge at some point, so the question is whether the Fed will be there to backstop the rise to any significant degree.

Still, gold is caught between the conflicting narrative of surging Covid-19 cases and vaccine news. Despite being supported by financial fragility and ongoing Fed policies, the yellow metal still faces an uphill battle to rally.

Crypto 

The crypto world is a lot less lawless and maniacal these days. There are clearer signs that crypto is becoming a viable emerging asset class by the month – and just not a hedge for the currency debasement story.

There’s a far more sophisticated player in the market that reduces the element of the wild, wild west nature of the game. Indeed, with more HFT and hedge funds participation, it brings a soothing effect to the market as not only does a higher level of risk management come to the fore, investors also feel better knowing that strong hands are there for support. 

Of course, there will always be a huge uptick on vol, like any other asset class, as price discovery takes over when markets move above recent fresh highs. 

Although you can read a gazillion opinions on why coins have gone moonshot, one thing is for sure: with pandemic-induced lockdowns forcing people to shop online, the rapid digitization helps matters greatly. With pandemic-induced lockdowns pushing people to shop online, the shift to cashless societies is moving forward rapidly, and that may bode well for digital money in whatever form it takes. Indeed, this is the bread and butter for blockchain technology, which should ultimately speed up the transaction process and where bitcoin is so intrinsically interwoven.

As the world continues to move deeper into the new age of global electronification and digitization, bitcoins could be in huge demand. The big problem is there’s only a finite number available.