Duncan Donald

Fri, Feb 5

Stocks continue higher as the US Dollar decouples amid strength of the “Vaccine Trade”

As the fallout from last week's invasion of the Robinhood retail trader brought last week starts to somewhat fade, following the abrupt fall of their championed stock picks and failure to capitalise in a foolhardy attempt to drive silver higher earlier in the week.  


The stock market settled back into the groove of the continual grind higher, buoyed but certainly not overstating the overwhelming positivity brought by earnings season. There was a slight shift in dynamics this week as the “vaccine trade” emerged as the US Dollar based driver. 


Whilst we had become used to positive stocks meaning weaker dollar as the “risk” trade there was a clear disjoint from this as the US behind Israel and the UK ramped up their vaccination program, making positive strides in the distribution and facilitation of the vaccine.  Coupled with a plateau and modest downturn in infection rates suddenly the US Dollar became more in demand in its own right, rather than a by-product of the stock market moves.


There remains a lot of work to be done over the stimulus plan as Joe Biden pushes ahead with his large cheque manifesto promise keen to get a bipartisan agreement with 10 Republican Senators keen to reduce the payments.  


Next week we will see the news dominated by the impeachment trial of Donald Trump, with him seemingly reluctant to attend the trial. This should not typically be a market driver, but it will of course dominate the headlines. 


Whilst we retain our view of near-term gradual appreciation of the stock markets, we do have to start considering the timing of exit. There are two factors that must be considered in the forward outlook. Firstly, due to low interest rates US savers have been driven towards the stock markets for return, whilst the Fed are signalling that isn’t about to change in the near term, however IF the battle against the vaccine starts to be won at pace, we could see a migration from stocks back into typical safer and secure banking products. Secondly, if we look at the opposite virus scenario, where whilst modest improvements are happening now, there remains concerns that the US has not faced the second wave and strain of the virus and if that was to materialise this would certainly weigh on the stock markets questioning the optimism.


The other benefactor of the “vaccine trade” is the UK’s Pound. Whilst still battered and bruised from the Brexit fallout, the prompt approval, distribution and delivery of vaccines has been impressive. As such the pound has enjoyed a strong week even against the US Dollar as confidence to build reserves and long positioning grows. 


Whilst we remain weeks if not months from a normalisation of social and business activity it is starting to feel like a degree of normality is coming in spring/summertime. This was underpinned this week at the UK Bank of England MPC meeting where, as expected interest rates were left unchanged. But it was the comments in the press conference from Head Andrew Bailey where he looked to clarify that past discussion on negative rates was purely precautionary, and that whilst financial institutions should prepare themselves structurally to deal with them, the BoE do not seem the possibility of a rate cut to negative in the next 6 months, triggering heavy Pound buying.


As noted last week in our update we have been and remain a big supporter of the long EUR/GBP trade which has been one of the biggest currency movers of the week making a low of 0.8740 as the Eurozone remains well off the pace with the vaccine rollout and struggling with political disruption in Holland and most notably Italy. 


This week also brought news that the German Council of Economic Experts may need to cut 2021 German GDP Forecast which within the stronger countries of the bloc bears concern. With the Euro falling 4 of the 5 days this week and global stocks on the rise, Euro Stocks did enjoy a good week with the DAX in touching distance of all time highs on Thursday. 


From a data perspective, it's a relatively quiet week ahead with New Year celebrations but as always, Virus levels, US Stimulus and perhaps for the last time Trump news will dominate the markets.


Have a great week and Happy New Year!

The Week Ahead:


Monday - A quiet start to the week with early data from Japan with Lending, Current Account and Economic Sentiment Data. From the Eurozone we get German Industrial Production and Euro Sentix data. 


Tuesday - Early in Asia we get the UK BRC Retail Sales numbers before NAB Business Confidence,New Zealand's Inflation Expectations and China’s Trade Balance. In the European Session its Trade Balance data from Germany and Italian Industrial Production numbers.


Wednesday - The day starts in Asia with Japan’s PPI as well as China's CPI and PPI numbers. In the European session we get German CPI, French Industrial Production and UK NIESR GDP Estimate. From the US its CPI and Wholesale Inventories numbers before the BoE Bailey and Fed's Powell both deliver speeches


Thursday - With China and Japan both on national holidays the first data comes with UK RIC’s house price data before European Economic Forecasts. In the US session we get weekly Unemployment Claims. 


Friday - With much of Asia still on holiday the first numbers come with a data dump from the UK as we get UK Prelim GDP, Construction, Trade Balance, Industrial Production, Manufacturing Production and Prelim Business Inv numbers. European Industrial Production comes later in the morning and in the afternoon we get US University of Michigan Consumer Sentiment and Inflation Expectations.