As US S&P e-minis set sights on 3275 where a break will trigger a risk parity move to 3300, it's the ultimate recession-stopper in the form a vaccine that reigns supreme.
Asia continued where Europe and Wall Street left and have just handed the bullish baton over to London.
So the hot takes about market tops, and key reversals proved to be well wide of the mark, as US equity markets bounced back in convincing fashion and more. Risk was single-handedly kicked into high gear, after positive vaccine trials produced antibodies to the virus.
I thought the FOMC would turn full-tap towards the end of the week, but risk sentiment is rocketing higher on the vaccine news. Still, it is also getting helped along by the last week dovish run of Fedspeak, despite the fact we are the middle of the blackout period for the July 28-29 FOMC meeting.
Traders are having bullish visions of Chair Powell peeking around the curtain, waiting to rush the stage with money bags in tow, eschewing familiar themes, whether hinting of YCC, talking about inflation-overshoot, all the while enveloped in low-interest rates for the eye can see.
Indeed. Investors are revelling in the vaccine news, while wrapped in the FOMC comfort blanket today.
EU Deal Through The Lens Of The EUR/USD Trader
EUR/USD spiked to 1.1470 following the recovery fund deal announcement but has since traded lower. On the face of it, this suggests it was all priced in already. I doubt that and would expect a more robust delayed reaction in the London session. That should fuel further equity re-allocation towards Europe and provide another boost to peripheral bond markets.
After 5 days and 34 minutes short of the most extended-ever summit, we finally have agreement around the EU rescue fund with €750bn being disbursed in the form of €360bn in loans and €390bn in grants, in line with what was speculated yesterday. We also had signed off on the EU's next 7-year budget worth €1.074tn. The frugal four got concessions in the form of rebates and an emergency brake. Definite risk positive, although by and large-priced in, however, it should allow for further inflows into Europe, especially from US money managers.
As suggested this morning, after a marathon weekend of negotiations, one would assume that most of the summit's good news is in the price. But since it will be a lengthy process for the funds to get doled out and probably years to see the economic impact. What matters the most for FX is that the market perceives the ECB backstop to be unwavering and that European break-up risk is mute. A deal unequivocally does both, and this is where the euro has room to surge, as policy discord has been at the heart of the euro's struggles since its inception.
Asia Currency Wrap
USD/THB remains supported with uncertainty after the weekend's pro-democracy protests, even though funding is elevated, at +0.4 pips per day. I think the market is watching for the government's reaction to public demands for a change in parliament and for allowing the Future Forward Party to return as the opposition. USD/THB should trade at 31.65/85 for now.
USD/KRW has been trading heavily. It broke clean through 1200 at the open, with equities trading higher equities and better risk sentiment despite Korea's poor 20-day export data for July. Spot traded down to a low of 1197 and is still trading around those levels. Positions and interest remain light, and I expect the pair to stay offered, with the month-end nearing.
USD/MYR is struggling to hold on to gains below 4.26 despite all systems green as far as oil market stabilization and positive risk sentiment. Still, the political risk may remain the overhang even though the new government survived their first significant parliamentary vote last week, which reduced the risk of a no-confidence vote. The BNM remains dovish and is likely to deliver another cut. The issue now is that foreign bond positioning is no longer light, and as we've seen so ofter before will run for the exits on the first hint of political risk. Indeed, this may be holding a bid under the ringgit.