Monday’s Bullseye: 16 November 2020

Here is our week ahead preview for the week commencing 16 November 2020

Unless you have been living under a rock, the biggest news of the week was on the vaccine front, after Germany’s BioNTech and the US pharma giant Pfizer announced that their jointly-developed vaccine candidate had outperformed expectations in the phase 3 trials. This was the first Covid-19 vaccine to clear interim clinical trials proved 90% effective in preventing people from falling ill. The news triggered a big rally across all risk assets, causing value stocks  - those that rely on economic growth – to sharply outperform growth stocks, while crude oil, commodity dollars also rallied as haven assets such as gold and yen slumped. The moves faded as the week wore on, although on Friday the bulls attempted to step back in, causing European stocks and US futures to rise. Gold and silver also managed to rebound as bond yields fell back.

Vaccine optimism vs. surging virus 

In the week ahead, investors will be monitoring the virus situation closely. While virus cases have plateaued at some parts of Europe, the US has again shattered pandemic records. The world’s largest economy reported more than 153,000 new coronavirus cases on Thursday, while 66,000 people were hospitalized nationwide. This was the seventh time in nine days that the US broke its daily infections record.

Due to this ferocious rise in coronavirus infections and in turn the expanding lockdown measures, economic activity in a number of major advanced economies have already dropped sharply in the first weeks of November. The decline has been particularly strong in Europe, where the latest wave of infections started first. In the coming weeks, it is expected that the US will report a similar downturn in economic activity, as virus cases, deaths and hospitalization continue to rise there.

The key question is whether investors, who in recent months have largely been ignoring the pandemic, will pay much attention to the deteriorating situation, or whether hopes over a vaccine will continue to offset those economic worries.

I suppose it depends how bad the situation gets. Some US states have ramped up restrictions, while governors of Illinois and Rhode Island have warned that new lockdowns could be on the way. A full-scale lockdown to force people to stay home, say, for a period of four to six weeks is what some experts believe is the answer, but this is not feasible. However, if the US is forced to go down that route, then all hell could break loose again across the financial markets. As this is unlikely, the markets may be able to hang around nears their highs as the world awaits the first shots of the vaccines.

Brexit deal hopes still alive

If you can’t wait for 2020 to be over, spare a thought for the Brits and the dreaded B-word. Post-Brexit trade talks continue to go nowhere. However, investor remains hopeful a deal could still be reached before the end of the year – hence why the pound has been climbing higher. It is clear that the UK government will have to make some major compromises to secure a deal. The fact that two of prime minister Boris Johnson’s closest and “Vote Leave” advisors – Lee Cain and Dominic Cummings –  are going to depart the government later in the year, has raised speculation that the balance has tilted a little towards in favour of a deal than no deal.
Economic calendar highlights

Meanwhile, the macro calendar is not too heavy with important data in the week ahead, although there are a handful of events the has the potential to move the markets – not least Chinese data at the start of the week and the CBRT’s rate decision on Thursday.

  • Data: Japan GDP and Chinese industrial production, retail sales
  • Central bank speeches: RBA Gov Lowe, ECB President Lagarde and FOMC Member Clarida
Tuesday: US retail sales and speech by BoE Gov Bailey

Wednesday: CPI from UK, Eurozone and Canada, as well as US building permits and housing starts

  • Data: Monthly employment data from Australia and Canada, and US jobless claims
  • CBRT policy decision – see notes below
Friday: Retail sales from Australia, UK and Canada
Lira TRYing to create a major low ahead of CBRT

One of the biggest movers in the FX markets this week has been the Turkish Lira. The currency has bounced back more than 10% against the US dollar after repeatedly hitting record lows. More gains could be on the way if investors truly believe that President Recep Tayyip Erdogan will stick to his pledge of swallowing “bitter-pill policies” if needed.

The lira hit a new all-time low after the country’s central bank kept policy unchanged instead of raising rates to dampen surging inflation. Erdogan has long been an advocate of low rates, but after the nation’s currency kept plunging to record lows, inflation rose to uncomfortable levels and the economy suffered, he finally seems to have succumbed to pressure to change tack. He replaced his son-in-law Berat Albayrak by Lutfi Elvan as the new Finance Minister and got rid of the former central bank governor and replaced him by Naci Agbal. Mr Agbal will hold his first Monetary Policy Committee meeting on November 19. The eyes of the world will be on him. He is widely expected to hike borrowing costs sharply. Erdogan has said that he will stand by the actions of the new finance minister and central bank governor “in every step they take.”

So, traders are piling into the lira and other Turkish assets amid speculation interest rates will rise sharply next week, which should hopefully dampen inflation and bring back credibility. Added to this, news of the Pfizer vaccine has lifted the mood towards risk assets, which has undoubtedly added to the buying pressure behind Turkish lira and other emerging market currencies. 

USD/TRYSource: ThinkMarkets and TradingView