Waiting on Stimulus Breakthrough

Fundamental analysis of Forex market

Wall Street opened a little lower on Thursday as we await the FDAs decision on the Pfizer vaccine and US lawmakers push ahead with stimulus talks.

Following statements earlier this week, the decision to grant emergency use authorisation to the Pfizer/BioNTech vaccine looks a foregone conclusion and once it comes, any upside for the market may be relatively brief. The risks are firmly to the downside, especially as the UK and Canadian authorities have already signed off, but the odds of any issues are very slim.

The stimulus talks are far from a foregone conclusion. Both sides appear to be getting closer on what it will contain and more sacrifices from both will likely be needed in order to get a slimmed down version through before the end of the year and avoid a cliff-edge scenario.

They’ve bought themselves another week in their desire to attach any relief package to a spending bill and avoid a partial government shutdown over the festive period. But that doesn’t necessarily mean they’ll be able to bridge their remaining difference. I do believe that something will pass that sees the country through to the new administration but negotiations will have to begin again almost immediately to avoid a similar situation early in the new year.

Euro higher as ECB unleashes more stimulus

The euro rallied a little after the ECB announced a raft of measures aimed at maintaining support for the euro area economy. The measures including an increase of €500 billion in the PEPP envelope – all of which need not be used – and a nine month extension to the program, as well as a 12 month extension to TLTRO III and four additional PELTROs next year.

The package was substantial but broadly in line with what the market was expecting which probably explains the currency movements. With the second wave having been more severe than the central bank was anticipating and growth next year lower as a result, more support may be needed in the recovery phase but that won’t be for some time yet.

No deal risks grow as Crunch Brexit talks didn’t go to plan

Wednesday evenings dinner between Boris Johnson and Ursula von der Leyen wasn’t exactly the game changing moment we all hoped for, with the two leaders stressing the differences that remain while urging negotiators to continue working towards a deal. It just seems empty words at this point; the only hope being that issues were worked on in private that could unlock talks in the coming days on certain areas.

A firm decision is now expected Sunday and while time is running out, so many deadlines have been missed at this stage, it’s hard to take that overly seriously. The firm decision may well be to perservere until Wednesday when leaders will assess the feasibility of more talks. And so on and so on.

The European Commission today appears to be proposing an effective extension to the transition on certain areas including fishing. Whether this is something the UK will go for, having imposed a strict legally binding deadline for talks to begin with, in order to avoid a no-deal scenario isn’t clear. It won’t be politically appealing but then, neither will no deal.

The pound is coming under renewed pressure following the lack of a breakthrough yesterday evening. It’s fallen around three quarters of a percent so far today, as traders start to blink in the face of a possible no deal. Again, I see little chance of this happening but at the same time, the markets are not sufficiently reflecting the downside risks, in my view. More pain could come before a deal is reached.

Brent above $50 psychologically important

Oil prices are up more than 2% today, with Brent breaking above $50 for the first time since March. If it can hold on above this level, it could be a major psychological breakout after an incredible run for crude since the start of November. The next major resistance for Brent is $53.50 so we could even see it establish a new range.

WTI also hit a new high since March, falling just short of $47 at the time of writing. I do wonder whether a lot of good news is now priced into oil prices and perhaps not enough acknowledgement is given to how severe the Covid situation has become in parts of the world, most notably the US. That could continue to have an affect of the near-term outlook even if longer term it’s looking much brighter.

Gold pares losses but could test key support

Gold pulled strongly off its highs yesterday, bringing an end to a very good run for the yellow metal this month. A rebound in yields and the dollar seemed to be the key driver for gold’s reversal of fortune. It’s finding its feet a little today but is back below $1,850 and could find it difficult in the near-term. Should it drop lower, a test of $1,800 will be very interesting and could tell us a lot about the recovery we’ve seen in December. A flurry of stimulus from the US over the next week should be supportive.

Bitcoin testing December lows

Bitcoin recovered off its lows on Wednesday and made an impressive comeback. Unfortunately for the crypto, it’s not doing it any favours today, with it once again below $18,000 and looks likely to test yesterday’s lows. That won’t be a big deal really, the big test would be back around $16,000, should it get that far. A break of this would be a major blow in the near-term but I think a move above $20,000 is more likely at this point.