Asia Market: Investors dance in overnight vaccine news that fell like rain

US stocks are off early-morning highs but still trading firm as enthusiasm around positive news on progress in developing a virus vaccine, and continued robust macro data, continues to float markets in rough seas as the worsening outlook on the virus front continues to churn in the background.

At one point it was raining vaccines overnight, and investors are still dancing in that rain.

The Euro Stoxx tested the top end of the recent trading range (SX5E +1.9%), helped by a tweet about the Oxford Covid-19 vaccine from ITV News's Political Editor Robert Peston which said: "The vaccine is generating the kind of antibody and T-cell (killer cell) response that the researchers would hope to see."

The S&P 500 also closed on an upbeat note with US equities continuing to defy gravity as investor optimism revels amid the progress in developing a vaccine which continues to reign supreme.

Adding to the positive vibe, President Trump defused the US-China tensions and walked back an unwanted element of geopolitical risk that, quite frankly, no one wanted or needed at this point, with Covid-19 ravaging large parts of the US consumer complex. Indeed, the President's backpedaling is coming at a good time and keeping the omnipresent bears and prophets of doom at bay for now. 

But I think intraday action in US equities told us there’s a combination of rotation and unwind talking place. The market initially had a tough time holding onto early gains after the cover bid in value dried up and profit-taking started to seep in the long momentum/stay at home trade.

Sticking strictly with price action, it suggests there are some fidgety concerns in those thematic "Long Momentum" and "Tech Baskets" that have gotten a bit frothy during the vaccine headline deluge, since the actual end goal to get these vaccines out to the general public is still many months away – and that’s in the best-case scenario as few in the medical community expect vaccines to be rolled out anytime soon. 

Comments from Merck CEO Kenneth Frazier, provided a stark reminder not to get too carried away. Covid-19 vaccines under development are not guaranteed to work, and people who say to expect a vaccine before year-end are doing a "grave disservice to the public," Frazier said, according to Harvard Business Review (HBR), Reuters reported on Tuesday. What worries him is the pressure to move things along faster and faster to get back to normal:

"If you're going to use a vaccine on billions of people, you better know what that vaccine does," he said in the HBR report published on Monday, per Reuters.

The most important question right now: is this the beginning of something more substantial, or just a small correction as we’ve seen so many times over the past year while the wall of money remains firmly on the bid.

Is it time to put the seat belt on again? I don’t know about you, but I have my seat belt on all the time when it comes to investing in the Covid-19 environment.

Forex Markets

EURUSD has reached the Bloomberg consensus forecast for year-end today and given it’s easy to poke holes in the Recovery Fund thesis – not to mention EU lawmakers’ uncanny ability to snatch defeat from the jaws of victory – has likely encouraged some profit-taking on EURUSD longs.

But what started for some as little more than to buy the Euro into the EU summit, which was the most basic of FX trades from a 101 class, with numerous bearish USD signals developing, we might be in the midst of a big broad dollar turn that’s likely to continue throughout the year.

In any US dollar weaker thesis, you need EURUSD higher and USDCNH lower. 

Despite the uptick in US-HK geopolitical escalations, USDCNH has continued to move south as the PBoC has taken an absolute hands-off approach to currency management this time around, suggesting they’re welcoming stock market inflows. Indeed, China is open for business in more than just the industrial and consumer front: the domestic capital markets have rolled out the welcome mat.

As for Fed policy, it looks like rates will be low for as far as the eye can see, and they’ll only raise rates when the whites of inflation’s eyes are visible. With the Fed providing ample liquidity, equities bid into every dip. The market is seemingly ignoring an increase in Covid cases and that’s making for a comfortable backdrop to stay short dollars. 

Fed Governor Brainard went further than recent Fed speakers by endorsing yield-curve control, which would set the USD up for a more pronounced and broad-based weakness. 

The push back on the short dollar trade is the US haven appeal. With pockets of the virus emerging everywhere, the narrative goes that a second wave will come back, global growth will be weak, and the dollar will again rally. But this belies the fact that the world outside the US has a much higher capacity to handle the virus, thus limiting the economic damage. 

Any which way you slice the cake, on both the healthcare and the economic fronts the US (both North and South) come out as big losers, while Europe and North Asia are the big winners.

Gold markets

Gold remains floated by long-term supportive factors but could be lacking the necessary fresh or "new" inputs to push prices above year highs.

Fed speakers were all on the dovish side this week, despite the improving macro scrim. But Governor Brainard provided the most interesting comments, saying there was a "thick fog of uncertainty" and "downside risks predominate". Financial support was vital, and she warned that it could be appropriate to shift the focus of monetary policy from stabilization to accommodation.

The bigger picture for gold is that there’s more to come on top of the WWII-sized stimulus already injected into the economy.

Cross-asset performance in recent sessions points to 'liquidity-on' over 'risk-on'. S&P 500 and gold are assets you would typically expect to move inversely to each other, but both benefit from incredible central bank liquidity deluges.

But without putting in some headroom above $1,825, the market could still fall prey to technical and fast money selling as wealth management and strategic gold buying has dried up this week. In other words, bids are not that big these days, with long positions tapering positions as gold investors want to leave some room to buy on dips.

With US-China tensions getting diffused by President Trump, it may give more cause to take some profits above $1,800.