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WEEKLY NOTION - Moderna, the Life of the vaccine party

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The vaccine rotation trade got another burst of momentum overnight, with Moderna's Covid-19 vaccine preliminary data indicating a 94.50% effectiveness. More importantly, it can be stored in a beer fridge, and not in Antarctica, making distribution logistics exponentially easier. We are likely to get other companies releasing preliminary data before the year-end. However, with two viable candidates, even if others fail, the vaccine party will still carry on into the early morning hours. 

The release of the Moderna results saw another spurt of buying flow into super spreader sectors such as airlines. Interestingly, the work-from-home side of the market held its own, with all three Wall Street leading indices finishing higher overnight. With Covid-19's biblical comeback crashing over Iran, Russia, all of Europe, the US and Mexico, and others I'm sure I've missed, we will all still be working from home for some time to come, vaccine or no vaccine. 

Restrictions continue ramping up in Europe, with the Swede's the latest to join in. The situation in the United States is particularly worrisome, with new state-wide restrictions seemingly every day. The election stand-off is complicating the picture, and it seems inevitable that US economic data will suffer into Q4. America matters as 25% of global GDP. 

That all points to more policy easing by the European Central Bank and the Federal Reserve in December. They won't be alone. Awash in a world of increasing torrents of zero per cent money and bond backstopping from the Fed, a weaker US Dollar and further asset (read stock market), price appreciation seems inevitable. The arrival of Covid-19 vaccines appears to be making the "buy everything" trade, literally "buy everything." Except for the US Dollar, that is, 2021 will not be kind to the debased greenback. 

The Asian data calendar is quiet today, following the raft of releases yesterday. Looking back, Indonesia's Balance of Trade rose to a higher than expected $3.61 billion. The headline flatters to deceive though, disguising a collapse in imports, while exports underperformed as well. The domestic economy remains mired in recession. Japan's Industrial Production outperformed, rising by 3.90%, as did Capacity Utilisation, increasing 6.40% for September. 

That all ties in nicely with Singapore's Non-Oil Exports released today. Non-Oil Exports in October unexpectedly fell by -3.10% YoY. Exports rose to China, Japan and the US, but decreased substantially to its ASEAN neighbours dragging the headline print lower. The data highlights the North/South divide in Asia at the moment. Northern Asia is outperforming, while the Southern part of Asia, heavy with legacy industries and a collapse in domestic consumption, continues to lag. 

The arrival of Covid-19 vaccines, spurring growth, travel and consumption in the key export markets of Europe and the US, as well as their own domestic markets, will lift ASEAN in 2021. ASEAN is poised to play catch-up with Northern Asia and should outperform vis-a-vis it in 2021. That story though is likely to be one for the second half of next year. 

The US releases Retail Sales data this evening, with the street expecting growth to retreat to 0.50% MoM for October, versus 1.50% in September. Covid-19 will inevitably weigh on the data, and on the present trajectory, will do so again in November. A print lower than 0.50% may give markets an unwelcome wake-up call this evening, and see a burst of selling in equity markets, as well as a jump in the Dollar. With markets looking forward to Covid-19-free future, any volatility will be transitory. However, it will highlight that although the buy everything trade has some degree of herd immunity, it won't be a linear progression.

Asian equities post modest gains

The Moderna vaccine news lifted Wall Street overnight, with the S&P 500 rising 1.17%, the Nasdaq rising 0.80%, and the cyclical-heavy Dow Jones jumping 1.62%. In Asia though, the reception has been somewhat more subdued, notably amongst the more tech-heavy North Asia bourses. The Nikkei 225 and Kospi are up 0.25%. In China, the Shanghai Composite and CSI 300 have eased by 0.25% as the Yuan was fixed at a 2.5 year high this morning.

ASEAN markets, being more heavily cyclical, have outperformed today. Bangkok is 0.70% higher, with Jakarta up 0.90%, and Manila 0.25% higher. Singapore had rallied by 1.0%, but Kuala Lumpur is flat, as its surgical glove sector weighs on the local index. Australian markets reopened today but have only posted modest gains with the Covid-19 outbreak in South Australia weighing on sentiment. The ASX 200 has crept 0.25% higher, with the All Ordinaries eking out a 0.15% gain. Europe should also be poised for a positive open, although the Covid-19 situation in their here and now will temper exuberance.

The continual procession of Covid-19 lockdown news from key Northern Hemisphere markets appears to be muting vaccine exuberance this morning. Having priced in two years of growth in two hours after the Pfizer announcement, momentum in the rotation trade has also reduced. Although vaccines will change the game in 2021, supporting ASEAN markets in particular, until we have a better picture of when social mobility will return, we are unlikely to see the fireworks of the post-Pfizer price action.

That said, equities will remain solidly supported on any short-term dips as we advance, on a combination of monetary policy and vaccine-led recovery. 

Vaccine waves pass by currency markets

The Moderna vaccine announcement had a negligible effect on currency markets overnight. Asian and G-10 currencies were almost unchanged for the session, with only the pro-cyclical Canadian, Australian and New Zealand Dollars outperforming. The US yield curve steepened after the Moderna announcement, and that is likely to have offset any US Dollar rotation momentum in the short-term. The net result being a nil-all draw as far as currency markets are concerned.

Asian currencies have edged higher in Asia this morning after the PBOC set the USD/CNY fixing at 6.5762, the strongest Yuan fix since June 27th, 2018. With the PBOC showing no signs of discomfort over the Yuan appreciation, regional currency appreciation is set to continue, although local central banks in countries such as South Korea and Thailand, will probably tactically "smooth" gains.

The USD/JPY rally petered out ahead of its 100-day moving average at 105.75, with the 5-month trendline resistance at 105.65 capping gains. USD/JPY has fallen 115 points to 104.50 since then and now looks poised to retest its November lows near 103.20. Only a further steepening of the US yield curve appears likely to delay, and it is notable that higher US yields overnight still saw USD/JPY edge lower.  

The almost unchanged ranges seen overnight is likely to be a mere delay to further Dollar weakness. Amongst the majors, the EUR, GBP, CHF, JPY and Commonwealths all look poised for more technical gains. 

Moderna re-energises oil prices

Moderna's vaccine announcement had probably its largest effect on oil out of the main asset classes. Hopes of a return of social mobility saw airlines rally overnight, and that flowed through to anticipated oil consumption and higher oil prices. Oil had already rallied in Asia after robust regional data, with the vaccine news energising the rally further. 

Brent crude finished the day 3.0% higher at $43.85 a barrel. WTI leapt by 3.30% to $41.45 a barrel. In line with other regional markets, Asian trading has been muted, but both contracts have added 15 cents a barrel.

The vaccine news of the past two weeks has almost certainly put a long-term floor under oil prices, to OPEC's immense relief. We are unlikely to see Brent's November low around $36.00 a barrel retested anytime soon, even if Covid-19 weakens consumption in the US and Europe into the year-end.

That said, hope only goes so far. Brent crude will need to see the contango in its futures curve flip to modest backwardation before we can conclusively say the worst is over. In the meantime, it faces formidable medium-term resistance between $46.00 and $46.50 a barrel. It has support layered at its 100, 50 and 200-DMA's at $42.75, $41.60, and $39.80 a barrel respectively.

The Baker Hughes Rig Count has been quietly adding rigs in the US over the past few weeks, suggesting the worst may be over there as well. WTI faces medium-term resistance at $44.00 a barrel, a series of highs dating back to August. Its 100-DMA at $40.40 a barrel provides initial support. Only a failure of the 200-DMA at $36.00 a barrel will materially change my view.

 

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