Intraday Market Thoughts Archives

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Boris Johnson's playbook has always been to concede little and take negotiations to the absolute limit so it should be no surprise that we're here. At the same time, if he's bluffing that a no-deal Brexit is now a 'strong possibility', then he's pulling off an incredible bluff.

Sterling continues to hold at strong levels, suggesting that the bulls haven't panicked yet. The corollary is that the upside risk/reward for betting on a deal is limited. Ashraf mentioned the possibilities for scalping/daytrading GBPUSD for WhatsApp Broadcast Members. 

What's particularly worrisome is that there are so few positive murmurs from negotiations, nor are there any ideas floating around about how to solve the particularly-difficult level playing field provisions.

Add it up and the odds of a bad outcome are rising.

On the vaccine front, the US cleared a final regulatory hurdle for approving the Pfizer vaccine on Thursday and will almost-surely approve it on Friday. That may inspire a relief rally but we're watching the news from Sanofi and GlaxoSmithKline who delayed their vaccine program after it triggered a low immune response in the elderly. The product now won't be available until the end of next year at best.

Every vaccine matters because the enormous challenge of vaccinating the entire world. While the UK and US will be at the front of the line even with the current vaccines, the a faltering in other candidates stretches the timeline for the developing world, and ultimately curbs global growth.

In this case, the market may forgive one setback but two or three repeats would trigger a wave of risk aversion.

ًYou've all heard of the USD Index. Here is the euro index below. Euro firms above the 1.2100 after raising the PEPP by EUR 500 bn by 9 mths, while revising the inflation outlook to below 2% target through 2023. Boosting the the program of ultra cheap loans is seen as a positive for the currenct, especially after ECB pres Lagarde gave only a standard response to the inevitable currency appreciation question of watching the exchange rate "very carefully".  Hopes for a breakthrough in Boris Johnson's trip to Brussels were dashed after terse statements following the meeting. Sterling is off its lows, recoverying from earlier slump as EU/UK leaders gave until Sunday for deal progress. Indices resume their selloff, led by tech after the US govt's lawsuit on Facebook. Ashraf issued a new trade yesterday (currently 80 pips in the green) and will issue a new trade today  (Thursday) before the US close. 

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A three-hour dinner between Johnson and von der Leyen proved to be fruitless on Wednesday with both sides releasing statements saying they were far apart and that it was unclear whether gaps can be bridged. They promised a decision about whether to continue on Sunday, which sets the FX up for significant weekend risk.

The same problems on fishing, enforcement and level playing field remain with the latter appearing to be the most problematic. For its part, the market remains optimistic. Even after a sharp fall on the meeting headlines, sterling later recovered most of the decline.

Meanwhile the global theme continues to be strong economic data. UK October GDP cruised past expectations of a flat reading with a 0.4% gain. Industrial production was also firmer in the month.

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In year-over-year terms, Chinese CPI fell 0.5% in November. That's the first fall in 11 years and it was much softer than the flat reading expected. A big reason for the miss was food prices, which fell 2.0% in large part due to a fall in pork prices but even without food, CPI would have been down 0.1%.

The miss highlights some lingering questions about the Chinese and global economies. Despite its rapid handling of the virus, the Chinese consumer is struggling. Through October, Chinese retail sales are down 5.9% year-to-date compared to 2019.

The broader economy is strong but that's mainly owing to vast government investments.

One line of thinking is that the Chinese consumer simply retrenches in times of uncertainty. That may be the case but it may also be a sign that the global consumer might not be as strong in the post-covid era as anticipated.

An alternate thought is that China may be on the leading edge of the post-covid economies in potential currency pass-throughs. Large importing economies such as China with strengthening currencies tend to import disinflation, which may feed through capped commodity prices.  The Chinese yuan on Wednesday rose to the best levels against the US dollar since June 2018. How the export-sensitive economy responds to the strengthening currency may be an early warning sign for others, particularly Germany.

For now though the focus will be on Boris Johnson's trip to Brussels. Negotiations are in the end-game and Johnson has played his usual game of brinksmanship. It's worked before and a deal is in everyone's interest at a delicate time in the global economy but there is always the risk that he's pushed too much.

The vaccine is the light at the end of the virus tunnel but with the UK having already approved one candidate and the US set to do the same this week, the post-covid era is truly here. The first batch of 6.4m Pfizer doses is expected to be shipped to the US this weekend and vaccinations could start next week, with 40m doses before year end (two doses are required per person).

However the US has only ordered enough of that vaccine to protect 50 million people. A report on Tuesday said the US declined to order more cases in the summer and may now have to wait until June/July to get more. Other candidates may fill that timing gap but it's not certain. There appears to be some level of concern in the White House because on Tuesday Trump will sign an executive order saying that doses must go to Americans before being exported abroad. It's not clear that order will have any power.

The threat of commandeering doses paid for by other countries threatens to deepen international wounds and set off an every-country-for-itself scramble.

The EU has agreed to buy up to 300 million doses of the Pfizer vaccine but the timeline for distribution is not yet clear.

The UK has ordered 40m doses of the virus and will receive 800K on Tuesday with elderly care home residents and their caregivers at the front of the line. Some time soon the Queen will be vaccinated in what will be a powerful public message.

Canada has an interesting strategy in that it isn't at the front of the line for any vaccine but has ordered 440m doses of various vaccines at enormous cost. That's far more than needed for the 35m population but Canada will donate or re-sell unneeded supplies to developing countries in a move that could kickstart wherever they land.

With only cursory data, it appears that the US and UK will be the early winners in the G10 space. The US may have fumbled on Pfizer but there are six other leading candidates that will be approved in the months ahead, meaning that it's still likely to be widely available some time in Q2. The UK is likely to be close behind.

Other regions may be waiting until Q3, year-end 2021 or beyond for widespread availability and it's also important to note that testing has just begun on children so the timeline to vaccinate them will be long everywhere.

All of this will affect the granularities of the reopening but there are behavioural factors at play as well. Once the elderly and vulnerable are vaccinated, will places try to get back to normal?

Again, the US has shown more of a willingness than other developed countries to tolerate high infections and that may be the case again.

There's a consensus call for USD weakness in 2021 but there's also a good argument that the US economy could be a strong performer next year but it will depend on how quickly vaccine doses arrive.