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Vaccine reports continue to boost markets as post-Brexit trade talks go to wire – Bibby's FX update

23 November, 2020
Posted by: William Barns-Graham
Features

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Stock markets around the world continue to surge as developments in the hunt for a Covid-19 vaccine continue to be reported.

The announcement that the AstraZeneca and Oxford University phase three trials are reporting a 70% success rate is the latest to boost equities.

The Dow Jones Industrial Average has recovered to pre-pandemic levels while the Japanese Nikkei Stock Average is at its highest levels since the early 1990s.

Pound rises against the dollar…

The pound is benefitting from this wave of optimism, rising from US$1.322 at the start of last week to open this week at $1.335.

.. and the euro

It also gained on the Euro increasing from €1.115 to open this week around the €1.125 mark.

Its rise was less pronounced than against the dollar as the prolonged trade talks with the EU continue to cause some uncertainty. Talks were disrupted last week after one of the EU’s lead negotiators tested positive for Covid-19.

However, speculation is growing that there may be a ‘provisional application’ period for any deal agreed by the UK and EU, buying businesses more time to prepare for new trade rules.

If true, this would in theory support the pound as it would become less liable to the risk of a sudden no-deal outcome.

Dollar demand declines

Improved risk sentiment on the back of vaccine developments has seen a steady decline in demand for US dollars, which tend to do well in periods of global uncertainty due the currency’s ‘safe haven’ status. The US Dollar Index (DXY) closed the week hovering between 92.20 and 92.85.

However, US markets were resilient to suggestions from Treasury Secretary Mnuchin that government bailouts – including emergency lending from the Federal Reserve (FED) – are to be closed off at the end of the year.

Increased demand for oil continues

Oil continues to benefit from improving global risk sentiment with news of the vaccine increasing demand.

US West Texas Intermediate (WTI) and Brent crude oil open the week above the US$43 per barrel level for the first time since the beginning of September.

Bitcoin gaining safe haven status?

Bitcoin continues its rally after indications from some Central Banks that they would be open to its introduction – even if this would need to be accompanied by tighter regulations.

The cryptocurrency is reaching its best levels since December 2017, currently valued around the US$18,950 per bitcoin mark.

Investors are also now indicating that Bitcoin could be the investment of choice should there be a future spike in inflation as a result of global quantitative easing (QE) programmes. Investors usually turn to precious metals when governments turn to QE.

Week ahead

Increasing optimism over Covid-19 vaccines is likely to continue setting the tone for markets this week, though the impact of ongoing lockdown restrictions will be revealed by global PMI data today.

Chancellor Sunak’s spending review on Wednesday could have an impact on the value of the pound and speculators will continue to wait for any news from the UK-EU trade talks.

Thanksgiving Day is on Thursday, but market watchers will be keeping a close eye on minutes from the meeting of the Federal Open Market Committee (FOMC) on Wednesday where a decision on interest rates could be made.

There is a growing expectation of movement from the Fed and further monetary stimulus could reinforce the recent weakening in the value of the US dollar.

Economic Data 

Highlights this week include:

Today (23 November)      

  • Global PMIs for November
  • Speeches:
    • European Central Bank’s (ECB) Schnabel and Fed’s Daly and Evans

Tuesday      

  • German Q3 GDP
  • UK CBI survey
  • US Consumer Confidence report
  • API weekly crude stocks
  • Speeches:
    • ECB’s Lagarde, Schnabel and Lane
    • Fed’s Bullard, Williams and Clarida

Wednesday   

  • ECB Finacial Stability review
  • UK Treasury spending review
  • US weekly jobless data and Q3 GDP

Thursday    

  • US Thanksgiving holiday
  • ECB Monetary Policy statement
  • Speeches:
    • ECB’s Lane and Schnabel

Friday     

  • Eurozone Business climate and consumer confidence reports
  • Speeches:
    • Bundesbank President Weidmann
    • ECB’s Panetta and Schnabel