The Market Seems Primed for a Brief Pause

Written by: Craig Erlam | OANDA Europe

It's been a bit of a muted session so far on Wednesday, with small losses earlier being erased as we see some consolidation after the vaccine frenzy.

It's been a frantic few weeks, with the hype around the election barely easing off before vaccine euphoria took over. Perhaps we're now seeing a little fatigue kicking in ahead of what is likely to be a lively end to the year. 

More vaccine news, the first rollout, the winter Covid surge, central bank bazookas, Brexit and the Presidential transition. There's no shortage of risk events in the final six weeks of 2020. An eventful end to a year most will be happy to see the back of.

The Presidential transition is typically a procedural event but this time around it's going to be anything but. Trump is not leaving the White House without a fight, nor is he likely to accept the role of lame-duck President. If he's going to leave, he's not going to go quietly so at the very least, we can expect it to be a very eventful transition. 

With so much positivity priced into these markets, the risks are suddenly tilted a little to the downside in the short-term. Don't get me wrong, there's still plenty of good news that can come between now and year-end; Covid cases falling as lockdowns ease the spread, more vaccine news, a Brexit deal, more easing from central banks. There's a good chance we end the year on a high.

But in the immediate future, a lot of good news has been priced in very quickly and there may be a small void over the next couple of weeks that allows for a bit of a corrective move. And with Covid cases surging around the world, this could be the catalyst if lockdowns don't quickly bring the numbers back under control. This lockdown is very different to the last and that may have a significant impact on the success of it.

A Brexit deal is one thing that could come in the interim, with reports suggesting an agreement could even be reached early next week. It's inconceivable to think that talks could break down at this late stage so it may be more a feeling of relief than euphoria after four and a half years of agonizing over the UK's exit from the EU. It's also very UK-centric so any reaction will only be evident in the pound and other UK instrument, perhaps a little in the euro. The major risk here is to the downside if talks for some ridiculous reason collapse.

The economic calendar is unlikely to be the source of excitement today, or for much of the remainder of the week in fairness. Data is mostly tier two or three and, barring a couple of releases such as UK retail sales, US jobless claims and Aussie employment, it's a little thin. All the more reason why the winter Covid surge will likely remain front and centre.

USD pulls back, bitcoin explodes higher

An eventful few weeks saw the dollar briefly come back into favour as vaccine news invited the prospect of a w shaped recovery. Traders flirted with the idea that all may be good from next Spring but that enthusiasm appears to have faded and the dollar and yields have corrected themselves a little. 

Improved risk appetite has also been good for those currencies that have struggled at the low points of the pandemic and that have been more associated with periods of optimism. With London and Brussels seemingly closing in on a Brexit deal, the pound and euro are doing quite well and eyeing the summer highs against the greenback. 

It's actually in the crypto space where the big moves are happening. Bitcoin has exploded again this week after holding above $16,00 for a few days, only to rally another 15%, falling just shy of its all time highs of almost three years ago. It's surely only a matter of time until a new high is achieved. Although there's something about the immense gains of the last month that make me a little nervous, given past experience.

Oil pushing post-summer highs

Oil prices are edging higher again today after ending a little flat on Tuesday. There wasn't much to take from the JMMC virtual meeting, with the group not offering any recommendations of production changes, meaning we're left waiting until December to see what will happen in January. 

The two vaccine announcements have removed any urgency to act, with crude prices soaring more than 20% from this month's lows before settling comfortably above $40. That is perfectly acceptable for producers in the OPEC+ group for now and, should they remain above these levels, may allow for production increases in January, as planned. Of course, that will also depend on how the rate of infections progresses under the latest lockdowns in Europe and restrictions in the US.

WTI is pushing $42 again this morning, where it has met fierce resistance on multiple occasions over the last couple of months. The one exception being last week when it briefly surged above here before ending the day back below. Brent is pushing above $44 this morning and pushing the upper end of its post-summer ranges. The upside pressures are continuing to build.

Gold consolidates after paring losses

Gold appears to have fallen into a range between $1,850 and $1,900 over the last week after coming under considerable pressure in response to the vaccine news. The yellow metal is suddenly looking very vulnerable despite seeing some reprieve as US yields and the dollar corrected themselves. 

A little over-excitement in the immediate aftermath of the vaccine announcement has been met with a little more perspective now as the dust has settled. More vaccine announcements could continue to pile the pressure on gold though in the short term but beyond that, it could still perform well if the dollar remains under pressure.

Related: Vaccine Optimism Fades Quickly