Increasing virus concerns starts to outweigh vaccine optimism

Yesterday saw markets undergo a period of introspection, as further positive news about the Pfizer vaccine offset concerns about the increasing economic damage set to be caused by further restrictions and lockdowns, as infection and hospitalisation rates continued to rise.

While markets in Europe managed to eke out some modest gains close to their recent highs, US markets slipped back for the second day in a row, after New York mayor Bill de Blasio announced the closure of schools in response to the rise in cases. With mortality rates starting to rise again in Spain and Italy and infection rates rising to a record in Japan this northern hemisphere winter looks like being a long and dark one

The late sell-off in the US looks set to translate into a softer open here in Europe later this morning, after another mixed Asia session, and this is where investors need to make a calculation in balancing the risks of the virus, vs the vaccine.

With infection and hospitalisation rates rising, and the risk that current lockdown restrictions either remain in place, or get extended into 2021, the probability that any economic damage will become permanent is only likely to increase. These risks then need to be offset by the longer-term benefits of a workable vaccine, which even if starting to get rolled out next year, could take up to two years to really make a difference.

What’s particularly notable about the rally in Europe this month has been the relative underperformance of the DAX, which has lagged behind the likes of the Spanish IBEX, Italian FTSEMib, which are both up over 20% month to date, and the France CAC40 which is up over 18%.

This outperformance probably has more to do with the fact that the German benchmark has more or less pulled back its losses for the year, while the likes of France, Italy and Spain have seen their economies hit much harder as a result of the pandemic, and as a result are still well below the levels, they started the year with.

When combined with the positive news about the vaccine, these markets have slightly more ground to catch up, as the more beaten up sectors start to look slightly more attractive, for, and when any possible vaccine program starts to get rolled out.

The US dollar has continued to come under pressure, slipping for the fifth day in a row, though it still remains above the lows we saw at the beginning of the month.

The pound continues to be buoyed by the prospect that EU and UK negotiators are within touching distance of agreeing a trade deal by the middle of next week, though it always pays to be cautious at taking reports like these at face value.

One move that has slipped below the radar a touch this month has been the rise in the price of Bitcoin, which hit a three year high just above $18,000 yesterday, as it looks to retest the record highs of December 2017, just below $20,000. While a lot of scepticism still surrounds crypto-currencies, some in the investment community appear to have warmed to them, with a number of funds being launched this year, in order to take advantage of the move towards digital currencies, as part of a broader portfolio mix.

On the data front we’ve got the latest weekly jobless claims numbers which are expected to come in at 700k, a modest decline from 709k, with continuing claims set to fall back to 6.4m, from 6.78m.

EUR/USD – closed higher for the fifth day in a row, but progress remains slow. The bias still remains for a drift back down towards the 1.1750 level, while below the 1.1900 area. A move below 1.1750 opens up a return to the 1.1680 level, and then the lows this month at 1.1600.   

GBP/USD – had another look at the 1.3315 level yesterday but was unable to break above it. We need to move through 1.3320 to target the 1.3420 area. Support currently comes in at the 1.3170 area, while below that at last week’s low at 1.3106. If we break below 1.3070, we could see a move back to the 1.2980 area and 50-day MA. The major support area remains down near the 1.2850 area and the lows this month.      

EUR/GBP – continues to drift lower with the bias for a move back towards the 0.8860 lows, while below the 0.9000 area. We need to move up beyond trend line resistance near the 0.9020 area to stabilise and signal a retest of the 0.9080 area and 50-day MA.   

USD/JPY – having slipped below the 104.00 area we now look set for a retest of the lows this month at 103.18. A move back above 104.30 retargets the 105.00 area.   

FTSE100 is expected to open 55 points lower at 6,330.

DAX is expected to open 100 points lower at 13,102.

CAC40 is expected to open 33 points lower at 5,478.