As positive momentum in clinical trials for a Covid-19 vaccine was a pivotal contributor to the global equity rally over the summer, news has paused phase 3 clinical trials after a participant suffered a suspected severe adverse reaction is a setback for risk sentiment – Market Analysis – Optimism balloon (on vaccine hopes) suffers a leak.
These setbacks are not unusual in trials, and standard review processes trigger pauses to investigate the data.
Still, investors should closely follow the outcome of the investigation. But at the end of the day, the optimism balloon floated by vaccine hopes has sprung yet another sizable leak.
US dollar remains structurally weak
US real yields have not risen materially in the context of recent equity-market weakness, which suggests that the backdrop for structural US dollar weakness remains solid.
Still, the ECB could boost the USD near-term. A rally in EURUSD is also a prerequisite for broad USD weakness. Thursday’s ECB meeting is an important test, but it is hard to envisage a round of new stimulus from the ECB that could undermine EUR on a sustainable basis.
Euro vs USD: Keep an eye on the ECB
Long EUR positioning makes a near-term rally vs. USD challenging (e.g., Eurozone economic stimulus).
But more specifically, FX traders will be focused on EBC President Lagarde’s press conference in the context of ECB Chief Economist Lane last week pushing back against euro strength, and Executive Board member Schnabel’s more relaxed take.
How far Lagarde leans towards Lane’s interpretation is essential. Its sill likely takes a middle ground, but It would be a massively bearish EUR surprise if she took a harder line by describing the exchange rate as a “serious concern,” as Draghi did in May 2014, or Trichet’s characterization of “brutal” moves in FX through late 2007.
Beyond equities, some of the most notable moves have been in oil markets, where lower prices (-12.1% month-to-date) have pushed front-month Brent below the $40-mark for the first time since June. Rising contango – the largest since May – is pointing to oversupply in the market.
While the Tesla rout driving oil prices lower is just one more oddity in the oddest market of all times.