Investors received a shot in the arm from vaccine news, but these are having diminishing returns as virus cases continue rising. Not all markets are equal nor are currencies. How will the pandemic impact the dollar and the euro? What will central banks and politicians do? Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the latest developments and look toward the run-up to year-end.
Yohay Elam: COVID-19 cases, hospitalizations, and mortalities are rising in the US, the world's largest economy. Governors in various states have imposed new restrictions. For traders, the dilemma is: a stronger safe-haven dollar or rather a weaker one?
Valeria Bednarik: Yeah, and add to that formula: against what? Stronger or weaker against which other assets? Not that we have plenty from where to choose...Most major central banks have announced easing coming in December, and the ECB and the Fed urged policymakers for fiscal stimulus. Guess I can answer myself: Gold.
Joseph Trevisani: In the US as of 4 days ago... Hospitalizations were 4.7% above the yearly average of 2016-2018. Some states are much higher, Montana for instance at 35.3% and Vermont 21.4%, and others lower South Carolina -1.5%. The business restrictions have been limited to restaurants and such, mostly limiting hours. And requests by governors for travel and other voluntary restrictions and of course masks.
Valeria Bednarik: But winter is not even here.. if the US doesn't take action now, how do you think the numbers will be by the end of December?
Joseph Trevisani: I believe they have started to crest in Europe, but I have to check the latest data. You must remember that the hospitalization and fatalist rates are from a caseload 45 or 5 times greater than it was in the spring. 4 or 5. There has been no across the board business closure except for essential services, and I doubt there will be. I will be covering these and other statistics in my post today.
Yohay Elam: The measures that the government in Europe enacted are beginning to bear fruit, with curves bending in Spain and France, flattening in Germany. However, the euro has its issues. The ECB is set to announce a new QE in early December. And the EU is suffering internal fights over the budget.
Joseph Trevisani: Exactly. This is why there has been no real market response to this wave. Markets are looking ahead to vaccines and recovery.
Valeria Bednarik: I'm not sure about that. Instead, I believe the market is currently pricing in a steep economic downturn in Q4. Much larger than what they have anticipated. We are in that process. Digesting Q4 lousy perspectives, and waiting for central banks' actions to see if they are enough, or not.
Joseph Trevisani: I think that depends on what happens. It is possible that many states will try draconian closures again, but ever the governors who are most eager seem to recognize the costs both economic and personal.
Valeria Bednarik: For sure, lockdowns have a tremendous economic cost. But if they can prevent health systems from collapsing later into winter, the measures will be taken.
Yohay Elam: Lockdowns are the last resort. Rich countries can pay their way through lockdowns. Shutter, print money, and then be on a strong footing to recover. That is especially true when there is light at the end of the tunnel, the vaccine.
Valeria Bednarik: Today I was reading that the European OMS director said that if 95% of people wear masks, then lockdowns wouldn't be needed. But, at least in Europe, less than 60% of people do it. Guess the number is even lower in the US as masks became a political statement.
Yohay Elam: Indeed, masks have the best cost/benefit. Even Sweden changed course.
Valeria Bednarik: Meanwhile, the dollar seems to be strengthening on demand for safety.
Joseph Trevisani: Yes I agree with that. If hospitals seem to be overwhelmed, I think closures are much more likely. It's not that easy for small businesses, once they fail, restarting is far more difficult. I look at Manhattan and the empty store fronts... When that happens to a city, it can take years to recover, people leave. Many of the smaller cities ravaged in riots in the 1960s, like Detroit and Newark have never recovered.
Yohay Elam: The dollar was on the back foot after Pfizer's initial vaccine news.
Joseph Trevisani: Yes the Dollar is a bit stronger, but clearly there is no panic.
Yohay Elam: Vaccine news now has diminishing returns.
Valeria Bednarik: So back to your first question, guess the answer is a stronger dollar due to its safe-haven condition.
Joseph Trevisani: Vaccine is now the default, and so is the end of the pandemic.
Yohay Elam: ECB President Christine Lagarde said that we can finally see the other side of the river. She intends to help the economy wade this river.
Joseph Trevisani: Yes, but compare the recent, second wave dollar safety trade to the first. The dollar is still range-bound against the euro, and completely within trend versus the yen and the Canadian Dollar.
Valeria Bednarik: Yeah, vaccine news could be awesome, but it will take until the mid-next year to actually impact markets.
Joseph Trevisani: Did she use that metaphor? With here fancy outfits?. Her?
Yohay Elam: Only the first river metaphor, the second is mine, but reflects her intentions to add more PEPP.
Joseph Trevisani: Haha Somehow the image didn't fit.
Yohay Elam: Regarding volatility, I think that markets are awash with money.
Joseph Trevisani: I disagree it has already had a large impact, at least in the states, look at equities, record levels in the midst of a pandemic, that is discounting the future. There are, and as usual, the harbors for it are limited.
Yohay Elam: Volatility in currencies is somewhat limited. Gold has been more erratic.
Joseph Trevisani: We are waiting for a new scenario, the risk-off, dollar higher, risk-on, dollar lower is worn out. Will or should I say when will markets return to comparative economics?
Yohay Elam: Big events sometimes change reaction functions and correlations in markets. Comparative economics should favor EUR/USD shorts. The eurozone is set to suffer a double-dip recession. The US has a higher tolerance for deaths and will likely only slow down and not fall into recession. But the wildcard is the Fed.
Valeria Bednarik: Agreed. Regarding a return to comparative economics, I can't see it clearly yet. We weren't there before the pandemic, not sure why we would return so far away in time.
Yohay Elam: Will Powell join Lagarde with more QE?.
Joseph Trevisani: I am not sure it is fair to say we have a higher tolerance for death, though it may look like that to a European. It is true though that we perhaps value independence and less government regulation. At the moment I think Powell is hoping for a large stimulus package. There is certainly one coming, though timing and size are debatable.
Yohay Elam: The BOE made its move, the ECB is on course to ease in early December, and I believe Powell will grant a Christmas gift to markets in mid-December, but that is far from a certainty.
Valeria Bednarik: Powell is waiting for Congress, honestly not expecting a Christmas present from him.
Yohay Elam: Powell can continue waiting for Congress.
Valeria Bednarik: We are all in the top 10.
Joseph Trevisani: I agree, I don't think the Fed moves before a new president and Congress. Its tools are long-range, only a stimulus package could have an immediate effect. Yes.. a rather grim joke.
Yohay Elam: It makes sense to wait for another month. But if markets shiver, the Fed will deliver.
Joseph Trevisani: One interesting note on the list, almost all of sub-Saharan Africa are far down the list. Is that original?
Yohay Elam: Regarding Africa, no transport, no transmission, yeah, made it up now. When markets shiver, the Fed delivers. When the market shivers, the Fed delivers.
Joseph Trevisani: Perhaps, and South Africa is much higher than its neighbors.
Valeria Bednarik: Indeed. The Fed will deliver if necessary. Guess Powell will try to assess the extent of fiscal stimulus before going into monetary one.
Yohay Elam: I find it hard to see any deal in the lame-duck session, despite the virus' surge. But if politicians surprise us, markets should have a Santa Rally.
Valeria Bednarik: Yeah. Dull trading until then?
Yohay Elam: I think there's room for knee-jerk reactions once Pfizer receives authorization. And there are always Brexit headlines to cause see-saws.
Joseph Trevisani: I don't think we are going to get a deal until the new Congress. The Democrats got shellacked in the House and that is where the spending bills originate. Brexit seems to be only occupying the pound's interest.
Valeria Bednarik: You´re right, we have some minor catalysts in the way.
Yohay Elam: Shellacked is a result of expectations, Dems still won a majority. They do lag behind Biden in the popular vote. I don't see either party compromise before the Georgia runoffs.
Joseph Trevisani: I agree.
Yohay Elam: Compromising would take some energy out of the race. And both parties would like to keep their activists fully engaged.
Joseph Trevisani: Power will certainly Trump public interest.
Yohay Elam: Undoubtedly.
Joseph Trevisani: Rather standard for our species.
Yohay Elam: Power struggles are also present in Brexit talks. France and the UK are dueling over fisheries a minuscule part of both economies, but politically sensitive.
Joseph Trevisani: It's almost like they need to argue before agreeing?
Yohay Elam: Indeed. Each time I see an angry headline from either side, it makes me think a deal is close. Posturing before the compromise, good politics.
Joseph Trevisani: Yes, it's the Nixon in China paradigm.
Yohay Elam: Yeah. So, Santa Rally or a 2018-style market crash around year-end? I find it hard to bet against the Fed.
Joseph Trevisani: I'm in for the rally. Once the vaccine begins to be distributed...where else can markets go? The amount of rebuilding, repositioning, and economic change that has just been compressed into eight or ten months, guarantees a burst of activity.
Yohay Elam: I'm bullish as well
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