US equities were stronger Monday, S&P up 1.0% following slightly more significant gains through Europe and Asia. US10Y yields rose 3bps to 0.65%, sending the dollar higher and gold down.
Virus treatment news continues to underpin better sentiment. The US Food and Drug Administration indicated on Sunday that it had issued emergency authorization for a therapeutics regime to be used to treat virus patients. Also, the White House is considering applying an “emergency use authorization" as early as October to fast-track a coronavirus vaccine under development at Oxford. That would potentially see a vaccine available ahead of the US Presidential election, which could boost Trump's polling number, and provide stocks an added boost.
The positive coverage on potential Covid-19 vaccines and treatments opens the door wide open to a rotating carousel of stocks. A vaccine and possible treatment raise hope that in the not too distant future, symptoms of Covid-19 infections may become relatively mild, like cough and runny nose caused by influenza, and possibly the vaccine could even provide a cure. But in either outcome, the Covid flu will no longer pose a significant health risk, and the economy could return to standard quicker.
Indeed, the ultimate one-stop recession plugger could be a trip to your local clinic.
Asian stocks looked poised for modest gains after US stocks rose to record highs, and bonds fell on signs that the Trump administration may fast-track those specific vaccines and treatments for the coronavirus. IT stocks again outperformed the S&P500 while health care was the only sector to close in the red.
Big-cap tech continues to ride the towering wave of momentum. At the same time, the vaccine euphoria provides a wave of optimism for investors to test out market rotations for a time when vaccine is in hand.
While riding the high percentage of pandemic winners, the positive vaccine therapeutics news will offer investors the luxury to buy into and wait for the rest of the pack to play catch up over the coming months and years. Indeed, investors remain unfettered by central bank policy, which is expected to remain near 0% for many years ahead.
The other issue this week is that bond and, by proxy, currency markets need to consider is Jackson Hole. This year's symposium is titled "Navigating the decade ahead: implications for monetary policy." Fed Chair Powell speaks on Thursday on the Fed's policy framework review. His speech is expected to codify the view of the Fed's pivot to a soft average inflation target. With inflation running persistently below target in recent years, this shift will reinforce Powell's dovish message that the Fed is "not even thinking about" raising rates. But this is not likely to surprise anyone, with investors already convinced central banks would stay with "lower for longer" on interest rates.
The gold rally has stuttered on a combination of less dovish messaging from last week's FOMC minutes and risk positive virus treatment news flows.
Demand between $1,875 and $1,925 should remain relatively sticky as if there’s ever something of a known in economics, vaccine or no vaccine, it’s that the Fed funds rate will be low for a very long time. That’s not to mention the Fed has made it exceedingly clear that it will continue its current easy policy well into the recovery. The Fed is not leaving the party anytime soon as the markets further bifurcate the economy into haves and have nots which should be enough to float gold.
Since policy will stay very loose as far as the eye can see – and given the economic context has changed favorably – we could now see central banks shift to pursue inflation goals quietly but effectively. And this could be favorable for gold markets as, in the Federal Reserve Board’s situation, it's a recipe for US dollar weakness.
The gap in soft economic data between the US and Europe continues to weigh on 'fast money' EURUSD long. The USD is stronger this morning as the mirror to data-led EUR weakness and GBP's indifference to the summer bounce, which continues to see long currency positions pare risk on upticks ahead of Jackson Hole.
With the Fed expected to keep interest rates as low for as far as the eye can see, and Chair Powell expected to strike a dovish tone at Jackson Hole, it ensures the 5-year US bond yields remain flat to current policy. And with foreign investors staying on the hunt for yield, that‘s supporting the MYR.
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