For the second week in succession global markets have got off to a flier, with the FTSE 100 hitting its best levels since June, while US markets put in yet another record close for the Dow and S&P 500.
Once again it was optimism over a vaccine that prompted yesterday’s move higher, as Moderna Inc followed in the footsteps of Pfizer and BioNTech a week ago, by announcing that its own vaccine candidate had a 94.5% efficacy rate. Yesterday’s move higher was slightly more restrained then the turbo charged move just over a week ago, largely down to the fact that the Moderna news wasn’t as big a surprise as last week's Pfizer announcement, the results of which more or less came as a bolt from the blue.
Nonetheless the change in outlook and tone has been more than palpable, as pessimism about a Covid exit strategy has transformed into unbridled optimism, that we have a pathway to recovery, and multiple possible vaccine candidates. This pathway will no doubt contain the odd pothole in the form of setbacks around further trials, and possible concerns about side effects, which may help explain why markets closed down from their intraday peaks.
It is also impossible to ignore the current backdrop to the vaccine news, which is seeing a continuation in the trends of rising infection, hospitalisation and mortality rates across Europe and the US, with California being the latest US state to pull an emergency brake on 41 of its counties, equating to 94% of its population. The fact remains that for all the optimism over multiple vaccine candidates, none of them will be available to offset the problems currently being faced right now, as we head into a long dark winter of trying to keep a lid on the problems being faced in keeping the virus under control, until the weather warms up next year.
It was particularly notable that the biggest gains yesterday were in Spanish, Italian and French markets, though the outperformance of the IBEX also had the benefit of some much needed but fairly rare bank M&A activity, which also helped the European bank sector outperform. Oil prices also got a double boost, one from the optimism over another vaccine candidate, as well reports that Opec+ will prolong the current production caps.
As we look to today’s European open, and price action in Asia which saw the Nikkei 225 post fresh 29-year highs, we could see a slightly softer open as some of the froth gets blow off some of yesterday’s gains. On the data front we will be looking out for the latest US retail sales numbers which, in the past few months, have seen very much a V-shaped rebound from the big declines seen in the first part of this year. Since then we’ve seen 5 months of fairly solid gains, with expectations fairly high that we could get a sixth month of growth.
Despite the strength of the rebound in consumer sentiment, there are still significant concerns about the US economy, given that there are still over 9m more American citizens out of work than was the case at the beginning of the year. The sharp decline in the unemployment rate to 6.9% ought to bode well as we head into the end of the year, however to some extent it is masking the true state of the US labour market. Nonetheless, the surprising resilience in the labour market is expected to be reflected in another positive month of retail sales, with a gain of 0.6% expected, albeit a bit lower than the 1.9% rise in September.
EUR/USD – while below the 1.1900 area the risk remains for further declines towards support at the 50-day MA, near the 1.1750 level. A move below this level opens up a return to the 1.1680 level, and then the lows this month at 1.1600.
GBP/USD – still remarkably resilient despite slipping back from the 1.3300 area last week. The next key support lies at last week’s low at 1.3106, and below that near the 1.3070 area. 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 – found support at the 0.8860 area last week, and rebounded strongly back towards 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 – while below cloud resistance at the 105.60 level the risk remains towards the downside. The next key support comes in at the 104.20 area, with a break below 104.00 retargeting the lows this month.