Market overview

Positive vaccine development but rising coronavirus numbers now

COVID-19 numbers have risen sharply in Europe and the US, leading to the imposition of new restrictions and partial lockdowns that are set to weigh on economic activity in the months to come. Recent Phase 3 vaccine trials are showing promising results and markets have now started to price out some of the tail risks of subdued activity long into 2021. Despite recent positive vaccine news, a full rollout of vaccine programmes is still some way off and current restrictions are set to weigh on demand in coming months. In our view, the coming months will be a balancing act between bad numbers on COVID-19 and growth and (one hopes) more positive news on vaccine trials.

Fading risks from US politics and EU budget, but Brexit still lurk

The outcome of the recent US election, with Joe Biden elected President and a Democratic House, has led political uncertainties about China, trade, the US's COVID-19 handling and so on to fade a bit but uncertainty remains about who will get the majority in the Senate. It all boils down to two special Senate run-offs in Georgia, due to take place on 5 January. With a current leaning towards a Republican majority, incoming president Joe Biden may see himself a lame duck with a divided Congress when taking office in January, limiting the hopes of large fiscal easing in 2021, big infrastructure plans, tax hikes and so on. There has been progress on the EU budget but there are still significant hurdles left for the recovery fund. Further discussion still looms on the terms and conditions of the recovery and resilience facility and the ratification in national parliaments could prove a hurdle, with Hungary already threatening to veto the package. Notable among the remaining uncertainties is the Brexit process, which has the potential to rock the boat around New Year. However, we expect a simple free-trade agreement within coming weeks.

Market relief from fading uncertainties

Market relief on the back of the US election led risky assets to perform and volatility to decrease notably. Recent positive COVID-19 vaccine news adds fuel to the fire, leading more classic sectors such as banks and industry (EU) to outperform growth sectors such as tech (US),but current negative COVID-19 pandemic developments cap the topside for now. EUR/USD has moved towards 1.19 on the back of the US election but grinded marginally lower again despite positive vaccine developments and sector rotation. A weakening USD and fading short-term uncertainty have been tailwinds to emerging market FX, Scandies and cyclicals lately but such FX moves may not extend without further direction set by monetary or fiscal policy and/or sustained signs of global economic recovery.

USD weak for now but remains long-term winner

We see EUR/USD around 1.20 in 3M but longer term we believe the USD will still be 'the winner' and we forecast 1.16 in 12M. We target EUR/SEK around 10.30 in 1-3M before a move towards 10.10 in 6-12M on recovery tailwinds. Meanwhile, we see EUR/NOK on a downward trajectory supported by the external environment and strong domestics and project 10.40 in 12M. We expect EUR/GBP to go towards 0.86 on a resolved Brexit near term.

Oil market can see light at the end of the tunnel

Positive news on the COVID-19 vaccine front has brightened the outlook for oil prices. However, on the way to a rollout of vaccines and full reopening of economies, the oil market is likely to see new lockdowns curbing demand and inventories are still elevated. In addition, eventual normalisation of OPEC+ production levels and slowly rising shale oil output are headwinds to the oil market too. Thus, we expect oil prices to stay range-bound for the rest of 2020 but on a slowly upward path over 2021.

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