As financial markets become more enthusiastic about the prospects for a vaccine, the companies that have benefited the most from the fallout of the pandemic have been on the receiving end of some significant profit taking in the past couple of days.
This helps explain why the Nasdaq, which has led the gains higher this year, has slipped back for the second day in succession, as tech shares came under significant selling pressure in the face of rising US treasury yields, with the US 10-year yield hitting its highest level since March.
The move out of tech has also seen a rotation into the more traditional and beaten-down areas of the market as investors bet on an economic uptick towards the end of the first half of 2021, helping the likes of banks and energy stocks post some strong gains. These moves were particularly notable in European markets yesterday, as after a weaker start and what could have turned into a post-vaccine hangover, investors got a second wind and as a result, we saw a second day of decent gains, with the French, Spanish and UK markets outperforming the likes of the German DAX, which has lagged behind in terms of the moves higher this week.
The underperformance of the DAX may have something to do with the fact that the German index has managed to claw back all of its post pandemic losses, while the likes of the UK, French and Spanish markets have borne the brunt of the economic fallout of the pandemic, and still remain more than 10% lower year to date. Some of this underperformance can be put down to the higher infection, hospitalisation and death rates in France and Spain, as well as the UK, which has caused much more economic weakness, while the more international flavour of the FTSE 100, and heavy weighting towards energy, financials and consumer discretionary stocks has also hurt sentiment on this particular index.
This week’s news on a vaccine, while welcome doesn’t change the fact that France, Germany and the UK are still in the middle of partial economic lockdowns, while infection rates in the US have continued to rise, however for now markets appear content to ignore this and are focusing on the potential green pastures of a post-pandemic world, with a workable vaccine. Whether this is premature, only time will tell but for now investors appear content to ride this particular wave until it breaks.
It is certainly a significant leap of faith, and perhaps there may also be an element of trying to put a floor under certain sectors, particularly airlines which have cut their Q4 capacity to between 20% to 30% of last year’s levels. The prospect of a vaccine candidate, along with the relaxation of lockdown measures in December, appears to be driving a perception that in terms of a return to economic normality, airlines will be able to add capacity in the early part of next year, and even if they aren’t able to go back to normal at least we could see a return to over 50% of capacity by the middle of next year.
Of course, this perception relies on a vaccine being approved, produced and rolled out without too many problems in the next six months, and this month’s lockdowns being the last ones of note. This of course doesn’t leave a lot of room for surprises and setbacks, which means that as we head towards the end of the year, market volatility is likely to remain elevated.
Today’s start for markets in Europe is likely to be a subdued one given a mixed session in Asia, and that it is a Remembrance Day holiday in the US and Canada, and France also has an Armistice day public holiday.
EUR/USD – a key day reversal on Monday has kept the euro on the back foot, and while we remain below this week’s high of 1.1920, the pressure remains for a move lower, through the 1.1780 support and the 50-day MA. A move below 1.1780 could well signal further weakness towards the 1.1680 area.
GBP/USD – the move through the 1.3200 area opens up the September peaks, just above the 1.3400 area. This positive momentum has the potential to take us even higher towards the peaks seen at the end of last year. The key support on the downside remains down near the 1.3070 area, which if broken could see a slide back to the 1.2980 area.
EUR/GBP – has broken lower, sinking through the 0.9000 area and sliding below the 200-day MA, opening up the risk of a move towards the 0.8860 area and September lows. This area is a major support level, with a break below opening up the 0.8670 level. Resistance now comes in at the 0.9000 area.
USD/JPY – cloud resistance up near the 105.60 level is acting as a bit of top for now, with resistance behind that at 106.20. While below the 105.70 area, the risk remains for a move back towards the 104.80 level, and a move back towards 104.20.