Sive Morten
Special Consultant to the FPA
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Fundamentals
Markets fall in silence these days as everybody needs the rest after the tough year. As a result we have fewer subjects to talk about in fundamental part of research, but, still, there is something. Mostly attention of investors in short term stands upon the US stimulus programme and how it will develop, vaccination performance and few other issues.
Also our political risk factor around US President elections is coming to the "moment of truth" as on 6th of January there will be Congress hearings and debates where election's results have to be confirmed officially and finally. D. Trump's team intends to provide massive facts of fraud there. Thus either J. Biden officially becomes the President or D. Trump calls for emergency regime. There is no other options exists. All attempts to contest elections' results in courts of different levels have failed. Law system doesn't work. So, keep a close eye on 6-7th of January as a lot of news could be released on this subject.
So, in the United States, Trump signed into law a $2.3 trillion pandemic aid and spending package last week, averting a partial federal government shutdown that would have started on Tuesday. The House of Representatives voted on Monday to more than triple stimulus payments to Americans to $2,000 from $600, sending the plan on to the Senate for a vote.
The euro and pound also strengthened as London reopened after its Christmas break. Traders were digesting the EU-UK Brexit trade agreement reached late last week and relieved a ‘no-deal’ had been avoided.
“Markets are likely to wait until next week though before buying (sterling) again, fearful of massive bottlenecks at the English Channel as the new rules take effect,” Jeffrey Haley, senior market analyst at OANDA told clients.
While the deal came as a relief to investors, the bare-bones nature of the pact leaves Britain far more detached from the EU, analysts say, suggesting any subsequent gains will be modest and the discount that has dogged UK assets since 2016 will not vanish soon. Brussels has made no decision yet on whether to grant Britain access to the bloc’s financial market.
Commonwealth Bank of Australia wrote in a note to clients that the lack of an equivalence framework for financial services in the deal and growing support for Scottish independence are new headwinds for the pound.
Fueled partly by Brexit which many Scots oppose and partly by the poor handling of COVID-19 by Johnson’s government, support for Scottish independence has risen, threatening the 300-year-old political union between England and Scotland. Sturgeon has said that if her Scottish National Party wins elections to Edinburgh’s semi-autonomous parliament scheduled for May, an independence referendum should take place quickly.
State Street’s Wakabayashi said, however, that “Nothing has really been agreed (between the EU and London) on financial markets, and that’s a big negative for the UK.”
Mitsuo Imaizumi, chief FX strategist at Daiwa Securities in Tokyo, expects the pound and euro to decline against the dollar, reaching $1.30 and $1.15 respectively by the end of the summer.
U.S. Senate Majority Leader Mitch McConnell on Tuesday blocked a vote on increasing COVID-19 relief payments to $2,000, adding another delay to fractious negotiations over fiscal stimulus. But market sentiment was upbeat as investors remained optimistic that a stimulus deal will be eventually reached and that COVID-19 vaccines will facilitate a global economic recovery, lessening demand for the safe-haven dollar.
The latest setback “doesn’t really matter too much for investors, as they have been over the moon on the back of news that there is still plenty of fiscal support for the U.S. economy,” Naeem Aslam, chief market analyst at Avatrade, said in a note.
There were some signs of increasing inflation expectations. Breakeven rates on 10-year TIPS, which measure expected annual inflation for the next decade, slipped to 1.962%.
“The rapid growth in U.S. money supply and rising commodity prices are stirring up fears about a return of inflation,” wrote Schroders analysts in a note. These concerns are reflected in inflation-linked securities, with the 10-year breakeven inflation rate in the U.S. having risen from 0.5% in March to just under 2% ,” they said.
The dollar was ending 2020 in a downward spiral on Thursday with investors wagering a global economic recovery will suck money into riskier assets even as the U.S. has to borrow ever more to fund its swelling twin deficits. The prospect of a brighter 2021 has lessened the need for the safe-haven dollar, while burnishing the attraction of riskier assets especially in emerging markets.
Bears have also resurrected the “twin deficits” excuse for shorting the dollar - that the explosion in the budget and trade deficits means more dollars being printed and moved abroad. From this perspective the new U.S. stimulus bill is dollar negative as it adds to the nation’s debt, and President-elect Joe Biden is promising a lot more next year.
The country is also hemorrhaging dollars on its trade account where the deficit on goods hit a record $84.8 billion in November as imports surged past pre-pandemic levels. Likewise, the current account deficit widened to a 12-year high in the third quarter and there was a large shortfall in net financial transactions as Americans borrowed more from abroad.
In contrast, the European Union runs a huge current account surplus, largely thanks to Germany, so there is a natural inflow to euros through trade.
“The U.S. dependence on foreign savings is increasing and at 3.4% of GDP, it is approaching a danger zone where it will become increasingly difficult to attract savings without further dollar weakness, or higher interest rates,” said Alan Ruskin, global head of G10 FX at Deutsche, in a note. The deterioration in the ‘twin deficits’ will do nothing to improve USD sentiment, even if it does not as yet justify extreme USD undershooting either.”
“I expect the dollar to depreciate further over the next few years as the Fed keeps rates at zero whilst maintaining its bloated balance sheet,” Kevin Boscher, chief investment officer at asset manager Ravenscroft, told clients. The magnitude of the twin deficits dwarfs any other major economy,” he said.
Inoculation performance
All hopes for next year - everything from stock market returns to restaurant bookings - are bound up with the view that vaccines will gradually restore normality to a pandemic-ravaged world. The end of the holiday season should lend momentum to vaccine rollouts. The United States, Russia, Britain and the European Union have started inoculations, while developing countries are testing storage and transport facilities.
But there could be more pain before the gains kick in.
As hospitals from London to Los Angeles overflow amid the emergence of a fast-spreading COVID-19 variant, tighter lockdowns, travel bans and remote schooling look inevitable, meaning the setbacks seen to economic growth at the end of the year could extend into January.
Vaccine trials and distribution gather momentum around the world as global COVID-19 cases here surpass 81 million and deaths approach 1.8 million. In the United States, there have been more than 19 million cumulative cases and nearly 335,000 deaths.
Lockdown measures in England will be extended, and U.S. President-elect Joe Biden warned that it could take years for most Americans to be vaccinated against COVID-19 at current rates.
BioNTech is working flat out with partner Pfizer to boost production of their COVID-19 vaccine, its founders said, warning there would be gaps in supply until other vaccines were rolled out.
The delays in rolling out the home-grown vaccine have caused consternation in Germany, where some regions had to halt vaccinations within days of starting an inoculation drive.
“At the moment it doesn’t look good - a hole is appearing because there’s a lack of other approved vaccines and we have to fill the gap with our own vaccine,” BioNTech CEO Ugur Sahin told news weekly Spiegel.
The United States ordered 600 million doses of the BioNTech/Pfizer shot in July, while the EU waited until November to place an order half that size.
“At some point it became clear that it would not be possible to deliver so quickly,” Tuereci told Spiegel. “By then it was already too late to place follow-on orders.”
BioNTech hopes to launch a new production line in Marburg, Germany, ahead of schedule in February, with the potential to produce 250 million doses in the first half of 2021, said Sahin. Another vaccine from Moderna is expected to be cleared by the European Medicines Agency (EMA) on Jan. 6. Spahn has also urged the EMA to quickly approve the Oxford University-AstraZeneca shot cleared by Britain. The EU timeline for that treatment remains uncertain.
Sahin also said BioNTech would make its vaccine, which requires storage at about minus 70 degrees Celsius (minus 94 Fahrenheit), easier to handle, adding that a next-generation vaccine could be ready by late summer.
China approved its first COVID-19 vaccine for general public use on Thursday, a shot developed by an affiliate of state-backed pharmaceutical giant Sinopharm, as it braces for greater transmission risks over the winter. No detailed efficacy data of the vaccine has been publicly released but its developer, Beijing Biological Products Institute, a unit of Sinopharm subsidiary China National Biotec Group (CNBG), said on Wednesday its vaccine was 79.34% effective in preventing people from developing the disease based on interim data.
The approval, announced by the National Medical Products Administration, comes after the United Arab Emirates this month became the first country to roll out the vaccine to the public, and as Pakistan announced a 1.2 million dose purchase deal with Sinopharm. While China has been slower than several other countries in approving COVID-19 vaccines, it has been inoculating some citizens for months with three different shots still undergoing late-stage trials.
The approval comes as Britain on Wednesday approved a second COVID-19 vaccine, a shot developed by Oxford University and AstraZeneca, as it battles a major winter surge driven by a new variant of the virus.
COT Report
Data released by the Commodity Futures Trading Commission on Monday showed traders increased bets against the greenback in the week ended Dec. 21 to $26.6 billion. That was the highest in three months, Reuters’ calculations found. Sterling long positions grew ahead of the trade deal, the figures also showed, though the next set of data will reveal whether speculators “sold the fact”. EUR data shows shy decrease in long positions but it doesn't make significant impact on sentiment:
Source: cftc.gov
Charting by Investing.com
Next week to watch
On Monday, Europe will see its biggest transfer of share trading in over two decades after Britain’s automatic access to the European Union’s financial markets ends on Dec. 31. While the Brexit trade deal agreed on Christmas Eve set rules for industries such as fishing and agriculture, it did not cover Britain’s finance sector, which will soon get its first taste of the new regime.
Years of preparations since the 2016 Brexit referendum mean the transition of euro-denominated shares and derivatives from Britain should go smoothly. Still, it will be a test for the interest rate derivatives market - the Bank of England has warned of disruptions to swaps trading worth $200 billion.
Regulators have mostly downplayed risks, but they will be on high alert nonetheless. Once the “big bang event”, as described by one industry executive, is out of the way, markets can focus on the longer-term implications for the City of London.
Investors are also watching runoff elections in Georgia for two Senate seats next Tuesday that will determine which party controls the Senate. If the Republicans win one or both of the Georgia seats, they will retain a slim majority in the chamber and can block Biden’s legislative goals and judicial nominees.
If Democrats sweep the dual runoffs, the chamber would be split 50-50 and the tie-breaking vote would go to Vice President-elect Kamala Harris, giving President-elect Joe Biden’s party full sway over Congress. That raises the possibility of tax-reform proposals that many investors fear would hurt stock prices.
Joe Biden won Georgia’s 16 Electoral College votes to cement his U.S. presidential election victory. Now his fellow Democrats Raphael Warnock and Jon Ossoff are hoping to win the two Senate seats up for grabs in the state on Jan. 5. If the Republicans win one or both seats, they will retain their Senate majority, enabling them to block Biden’s legislative goals.
Markets interpreted the Nov. 5 election outcome -- a Democrat presidency and Congress, or lower house, alongside a Republican Senate or upper house -- as the best of both worlds, allowing big-ticket stimulus while blocking tax hikes and tighter regulation. Many fret that a Democrat win in Georgia will disrupt that balance, threatening the Santa Claus rally. (The Santa rally -- equity moves in the last five trading days of December and the first two of January -- has lifted Wall Street in 55 of the past 74 years.) The rally hasn’t faltered yet. But as the Georgia vote nears, investors may judge it wise to take some chips off the table.
Vaccine optimism has propelled crude prices 6%-8% higher in December, in a positive end to a year that actually saw U.S. futures turn negative in April. Now the focus is on the (virtual) Jan. 4 meeting of OPEC+, the Organization of the Petroleum Exporting Countries and its allies. Having implemented a record 7.7 million barrels-per-day supply cut to stabilise prices, OPEC+ backed away in December from plans for a 2 million-bpd output boost. Instead, it upped production by 500,000 bpd and agreed that further monthly adjustments would not exceed that amount.
Russia has indicated that it will support another 500,000 bpd production increase from February, despite concerns from some other members in the alliance the move was premature. The latest pandemic wave has not hit oil prices significantly but expect the supply (and demand) issue to be hotly debated.
The first major U.S. data point of 2021 will be Friday’s jobs numbers, which could show a slowdown in the pace of hiring. November data already indicated the employment market was losing steam, with 245,000 new jobs added, the fewest in six months. For December, expectations are for an even smaller 159,000 gain.
As of November, the economy had recouped only 12.4 million of the 22.2 million jobs lost in March and April.
Bank of America analysts forecast non-farm payrolls growth of just 50,000, leaving unemployment unchanged at 6.7%. They note “concerning signs” in the labour market, attributing them to renewed pandemic-linked restrictions on businesses.
As you could see guys, although we do not have a lot of new driving factors - new details are important. First is concerning vaccination. Recent comments from respectable people above confirms our view that we already mentioned previously. Vaccination comes slowly and will be extended in time so that first results we will get by the end of 2021 at the best. Major reasons for that are threefold - not enough production capacity to produce necessary amount of doses in time, lower efficiency compares to laboratory tests and lower population agreement on vaccination. To get the effect, it is preferable to inoculate at least 65% of population, otherwise effect will be blur. But, according to polls, there is fewer amount of population agrees on vaccine shots, that stands around 40-45%.
Vaccination problems, in turn, makes direct impact on economy as recovery comes slower and Central Banks will have to spend more resources to stimulus. And here we come to very thin moment, a really special nuance of thin balance between amount of stimulus that is possible to provide before inflation starts to rise. Just think, that as longer we have no effect on virus struggle as more stimulus will be provided. This in turn means that inflation gets rising probability. Thus, common sense tells that pandemic has time limit until jump in inflation, right?
Have you thought why Daiwa Securities suggests drop in EUR and GBP by the summer (we've mentioned it above)? This is mostly by inflation expectations that put impact on Fed policy. This is the only reason why trend could turn in foreseeable future. It means that either vaccination should get first positive results to summer and Central Banks should start stimulus contraction, that also suggests US Dollar temporal strength, or - inflation starts to rise dramatically.
On GBP we have another hidden pit. Scotland May elections. This is another reason why Daiwa could suggests cable drop. I suppose that risks are very high that this will happen. Technically we have long-term bearish targets on cable around the parity, but till some moment driving factors stand unclear. Now we see potential ones that could trigger the collapse.
Finally, on short-term situation in the US. As we've said in last report, we suggest that economy data will be poor in IQ of 2021. In 4th quarter GDP will be lower than expected, while 1Q 2021 GDP could be negative. With "Twin deficit" on board this makes unprecedented pressure on Fed and US government to provide more stimulus. This is the reason why we do not expect significant growth of US Dollar until the spring.
Technicals
Monthly
December month shows good performance with minor reaction on COP target and acceleration on CD leg. As 1.25 resistance has been tested already in the beginning of 2018, EUR has relatively free area till the previous top around 1.25-1.2550 level. Overbought area stands around 1.27 and doesn't prevent upward action at all. MACD trend stands bullish, so on monthly chart we do not see any technical barriers for further EUR appreciation. The next target above 1.25 stands around 1.2850-1.30, that is OP and extension of BC retracement swing.
Here we add new pivot levels for 2021, the fulcrum stands around 1.16 that in general agrees with Daiwa's view. Combination of technical and fundamental factors tells that EUR should try to reach 1.28-1.30 area by the end of the spring. Strong technical resistance started from 1.25 area that EUR tries to challenge and hints from ECB that they are worry on too fast EUR appreciation tells that it could intrude as EUR will come closer to 1.30 level. This increases risks of deep retracement on EUR in the II half of 2021. Potentially other factors could join and provide additional pressure, such as contraction of Fed stimulus for example, in a case of epidemic situation improvements.
Finally, drop could happen much sooner if some extraordinary events happen, although now they stand in theoretical rather than realistic group. First of all I hint on possible surprises around US elections debates in Congress. In this case collapse to 1.16 could start right on the next week.
Weekly
Our next weekly target is XOP around 1.2450. It looks realistic as it stands in "performance envelope" compares to overbought range. So, gradually market could try to hit it within a few weeks. As major reaction on OP target is over, by market mechanics, price stands in extension mode as it is going to XOP. It means that any deep retracement here is irrational and only Fib levels of 1.16-1.22 swing are acceptable as pullback targets.
Last week we've taken detailed view on "bearish harami" pattern here. In general it is bearish and suggests downside reaction of different strength - sometimes major reversal, sometimes technical pullback, which is more probable in our case. It is not the hazard to our major tendency to XOP, but it just means that before upside continuation, EUR could show the pullback. For example, it could be re-testing of previous top around OP.
Now situation becomes more bearish as EUR has failed to out of the pattern and shows the W&R of its top. This increases chances on downside action on coming week.
Daily
Daily picture suggests initial drop to 1.21 area on the next week. All our upside targets here are hit - XOP is done, minimum grabber's target is done as well, as price sets new top. At the same time, daily trend has turned bearish, market shows W&R of the top and formed bearish engulfing pattern with sharp downside reversal.
Potentially downside retracement could become more extended and re-testing of 1.20 area support seems very probable. Still, right now we consider only 1.21 level as a target because of daily oversold level that stands around it.
Intraday
So, our 4H butterfly has been perfectly completed. As we do not have clear downside AB-CD's we consider few different targets. First is by the price shape - it might be H&S pattern with neckline around 1.2130-1.2150 that agrees with daily oversold and K-support here. This is our most probable and nearest downside target. Scenario is supported by MACD divergence as well.
Next targets are based on butterfly's ultimate extensions that it possible to use when reversal is forming. Thus, 1.27 extension points on 1.2080 target that agrees with next 1.2070-1.2115 support area, while 1.618 stands around 1.2015 and agrees with re-testing of previous 1.20 top.
Thus, for short-entry is possible to consider minor retracement to one of the Fib levels with stops against the top or far standing Fib levels. At first glance, 1.2245 K-area looks interesting:
That's being said, it seems that within 1-2 weeks EUR could show deeper retracement down as weekly/daily charts show bearish signs. Despite possible pullback we keep intact our medium term view by far, suggesting that EUR is possible to reach 1.28-1.30 target cluster, while major fundamental factors effect lasts.
Markets fall in silence these days as everybody needs the rest after the tough year. As a result we have fewer subjects to talk about in fundamental part of research, but, still, there is something. Mostly attention of investors in short term stands upon the US stimulus programme and how it will develop, vaccination performance and few other issues.
Also our political risk factor around US President elections is coming to the "moment of truth" as on 6th of January there will be Congress hearings and debates where election's results have to be confirmed officially and finally. D. Trump's team intends to provide massive facts of fraud there. Thus either J. Biden officially becomes the President or D. Trump calls for emergency regime. There is no other options exists. All attempts to contest elections' results in courts of different levels have failed. Law system doesn't work. So, keep a close eye on 6-7th of January as a lot of news could be released on this subject.
So, in the United States, Trump signed into law a $2.3 trillion pandemic aid and spending package last week, averting a partial federal government shutdown that would have started on Tuesday. The House of Representatives voted on Monday to more than triple stimulus payments to Americans to $2,000 from $600, sending the plan on to the Senate for a vote.
The euro and pound also strengthened as London reopened after its Christmas break. Traders were digesting the EU-UK Brexit trade agreement reached late last week and relieved a ‘no-deal’ had been avoided.
“Markets are likely to wait until next week though before buying (sterling) again, fearful of massive bottlenecks at the English Channel as the new rules take effect,” Jeffrey Haley, senior market analyst at OANDA told clients.
While the deal came as a relief to investors, the bare-bones nature of the pact leaves Britain far more detached from the EU, analysts say, suggesting any subsequent gains will be modest and the discount that has dogged UK assets since 2016 will not vanish soon. Brussels has made no decision yet on whether to grant Britain access to the bloc’s financial market.
Commonwealth Bank of Australia wrote in a note to clients that the lack of an equivalence framework for financial services in the deal and growing support for Scottish independence are new headwinds for the pound.
Fueled partly by Brexit which many Scots oppose and partly by the poor handling of COVID-19 by Johnson’s government, support for Scottish independence has risen, threatening the 300-year-old political union between England and Scotland. Sturgeon has said that if her Scottish National Party wins elections to Edinburgh’s semi-autonomous parliament scheduled for May, an independence referendum should take place quickly.
State Street’s Wakabayashi said, however, that “Nothing has really been agreed (between the EU and London) on financial markets, and that’s a big negative for the UK.”
Mitsuo Imaizumi, chief FX strategist at Daiwa Securities in Tokyo, expects the pound and euro to decline against the dollar, reaching $1.30 and $1.15 respectively by the end of the summer.
U.S. Senate Majority Leader Mitch McConnell on Tuesday blocked a vote on increasing COVID-19 relief payments to $2,000, adding another delay to fractious negotiations over fiscal stimulus. But market sentiment was upbeat as investors remained optimistic that a stimulus deal will be eventually reached and that COVID-19 vaccines will facilitate a global economic recovery, lessening demand for the safe-haven dollar.
The latest setback “doesn’t really matter too much for investors, as they have been over the moon on the back of news that there is still plenty of fiscal support for the U.S. economy,” Naeem Aslam, chief market analyst at Avatrade, said in a note.
There were some signs of increasing inflation expectations. Breakeven rates on 10-year TIPS, which measure expected annual inflation for the next decade, slipped to 1.962%.
“The rapid growth in U.S. money supply and rising commodity prices are stirring up fears about a return of inflation,” wrote Schroders analysts in a note. These concerns are reflected in inflation-linked securities, with the 10-year breakeven inflation rate in the U.S. having risen from 0.5% in March to just under 2% ,” they said.
The dollar was ending 2020 in a downward spiral on Thursday with investors wagering a global economic recovery will suck money into riskier assets even as the U.S. has to borrow ever more to fund its swelling twin deficits. The prospect of a brighter 2021 has lessened the need for the safe-haven dollar, while burnishing the attraction of riskier assets especially in emerging markets.
Bears have also resurrected the “twin deficits” excuse for shorting the dollar - that the explosion in the budget and trade deficits means more dollars being printed and moved abroad. From this perspective the new U.S. stimulus bill is dollar negative as it adds to the nation’s debt, and President-elect Joe Biden is promising a lot more next year.
The country is also hemorrhaging dollars on its trade account where the deficit on goods hit a record $84.8 billion in November as imports surged past pre-pandemic levels. Likewise, the current account deficit widened to a 12-year high in the third quarter and there was a large shortfall in net financial transactions as Americans borrowed more from abroad.
In contrast, the European Union runs a huge current account surplus, largely thanks to Germany, so there is a natural inflow to euros through trade.
“The U.S. dependence on foreign savings is increasing and at 3.4% of GDP, it is approaching a danger zone where it will become increasingly difficult to attract savings without further dollar weakness, or higher interest rates,” said Alan Ruskin, global head of G10 FX at Deutsche, in a note. The deterioration in the ‘twin deficits’ will do nothing to improve USD sentiment, even if it does not as yet justify extreme USD undershooting either.”
“I expect the dollar to depreciate further over the next few years as the Fed keeps rates at zero whilst maintaining its bloated balance sheet,” Kevin Boscher, chief investment officer at asset manager Ravenscroft, told clients. The magnitude of the twin deficits dwarfs any other major economy,” he said.
Inoculation performance
All hopes for next year - everything from stock market returns to restaurant bookings - are bound up with the view that vaccines will gradually restore normality to a pandemic-ravaged world. The end of the holiday season should lend momentum to vaccine rollouts. The United States, Russia, Britain and the European Union have started inoculations, while developing countries are testing storage and transport facilities.
But there could be more pain before the gains kick in.
As hospitals from London to Los Angeles overflow amid the emergence of a fast-spreading COVID-19 variant, tighter lockdowns, travel bans and remote schooling look inevitable, meaning the setbacks seen to economic growth at the end of the year could extend into January.
Vaccine trials and distribution gather momentum around the world as global COVID-19 cases here surpass 81 million and deaths approach 1.8 million. In the United States, there have been more than 19 million cumulative cases and nearly 335,000 deaths.
Lockdown measures in England will be extended, and U.S. President-elect Joe Biden warned that it could take years for most Americans to be vaccinated against COVID-19 at current rates.
BioNTech is working flat out with partner Pfizer to boost production of their COVID-19 vaccine, its founders said, warning there would be gaps in supply until other vaccines were rolled out.
The delays in rolling out the home-grown vaccine have caused consternation in Germany, where some regions had to halt vaccinations within days of starting an inoculation drive.
“At the moment it doesn’t look good - a hole is appearing because there’s a lack of other approved vaccines and we have to fill the gap with our own vaccine,” BioNTech CEO Ugur Sahin told news weekly Spiegel.
The United States ordered 600 million doses of the BioNTech/Pfizer shot in July, while the EU waited until November to place an order half that size.
“At some point it became clear that it would not be possible to deliver so quickly,” Tuereci told Spiegel. “By then it was already too late to place follow-on orders.”
BioNTech hopes to launch a new production line in Marburg, Germany, ahead of schedule in February, with the potential to produce 250 million doses in the first half of 2021, said Sahin. Another vaccine from Moderna is expected to be cleared by the European Medicines Agency (EMA) on Jan. 6. Spahn has also urged the EMA to quickly approve the Oxford University-AstraZeneca shot cleared by Britain. The EU timeline for that treatment remains uncertain.
Sahin also said BioNTech would make its vaccine, which requires storage at about minus 70 degrees Celsius (minus 94 Fahrenheit), easier to handle, adding that a next-generation vaccine could be ready by late summer.
China approved its first COVID-19 vaccine for general public use on Thursday, a shot developed by an affiliate of state-backed pharmaceutical giant Sinopharm, as it braces for greater transmission risks over the winter. No detailed efficacy data of the vaccine has been publicly released but its developer, Beijing Biological Products Institute, a unit of Sinopharm subsidiary China National Biotec Group (CNBG), said on Wednesday its vaccine was 79.34% effective in preventing people from developing the disease based on interim data.
The approval, announced by the National Medical Products Administration, comes after the United Arab Emirates this month became the first country to roll out the vaccine to the public, and as Pakistan announced a 1.2 million dose purchase deal with Sinopharm. While China has been slower than several other countries in approving COVID-19 vaccines, it has been inoculating some citizens for months with three different shots still undergoing late-stage trials.
The approval comes as Britain on Wednesday approved a second COVID-19 vaccine, a shot developed by Oxford University and AstraZeneca, as it battles a major winter surge driven by a new variant of the virus.
COT Report
Data released by the Commodity Futures Trading Commission on Monday showed traders increased bets against the greenback in the week ended Dec. 21 to $26.6 billion. That was the highest in three months, Reuters’ calculations found. Sterling long positions grew ahead of the trade deal, the figures also showed, though the next set of data will reveal whether speculators “sold the fact”. EUR data shows shy decrease in long positions but it doesn't make significant impact on sentiment:
Source: cftc.gov
Charting by Investing.com
Next week to watch
On Monday, Europe will see its biggest transfer of share trading in over two decades after Britain’s automatic access to the European Union’s financial markets ends on Dec. 31. While the Brexit trade deal agreed on Christmas Eve set rules for industries such as fishing and agriculture, it did not cover Britain’s finance sector, which will soon get its first taste of the new regime.
Years of preparations since the 2016 Brexit referendum mean the transition of euro-denominated shares and derivatives from Britain should go smoothly. Still, it will be a test for the interest rate derivatives market - the Bank of England has warned of disruptions to swaps trading worth $200 billion.
Regulators have mostly downplayed risks, but they will be on high alert nonetheless. Once the “big bang event”, as described by one industry executive, is out of the way, markets can focus on the longer-term implications for the City of London.
Investors are also watching runoff elections in Georgia for two Senate seats next Tuesday that will determine which party controls the Senate. If the Republicans win one or both of the Georgia seats, they will retain a slim majority in the chamber and can block Biden’s legislative goals and judicial nominees.
If Democrats sweep the dual runoffs, the chamber would be split 50-50 and the tie-breaking vote would go to Vice President-elect Kamala Harris, giving President-elect Joe Biden’s party full sway over Congress. That raises the possibility of tax-reform proposals that many investors fear would hurt stock prices.
Joe Biden won Georgia’s 16 Electoral College votes to cement his U.S. presidential election victory. Now his fellow Democrats Raphael Warnock and Jon Ossoff are hoping to win the two Senate seats up for grabs in the state on Jan. 5. If the Republicans win one or both seats, they will retain their Senate majority, enabling them to block Biden’s legislative goals.
Markets interpreted the Nov. 5 election outcome -- a Democrat presidency and Congress, or lower house, alongside a Republican Senate or upper house -- as the best of both worlds, allowing big-ticket stimulus while blocking tax hikes and tighter regulation. Many fret that a Democrat win in Georgia will disrupt that balance, threatening the Santa Claus rally. (The Santa rally -- equity moves in the last five trading days of December and the first two of January -- has lifted Wall Street in 55 of the past 74 years.) The rally hasn’t faltered yet. But as the Georgia vote nears, investors may judge it wise to take some chips off the table.
Vaccine optimism has propelled crude prices 6%-8% higher in December, in a positive end to a year that actually saw U.S. futures turn negative in April. Now the focus is on the (virtual) Jan. 4 meeting of OPEC+, the Organization of the Petroleum Exporting Countries and its allies. Having implemented a record 7.7 million barrels-per-day supply cut to stabilise prices, OPEC+ backed away in December from plans for a 2 million-bpd output boost. Instead, it upped production by 500,000 bpd and agreed that further monthly adjustments would not exceed that amount.
Russia has indicated that it will support another 500,000 bpd production increase from February, despite concerns from some other members in the alliance the move was premature. The latest pandemic wave has not hit oil prices significantly but expect the supply (and demand) issue to be hotly debated.
The first major U.S. data point of 2021 will be Friday’s jobs numbers, which could show a slowdown in the pace of hiring. November data already indicated the employment market was losing steam, with 245,000 new jobs added, the fewest in six months. For December, expectations are for an even smaller 159,000 gain.
As of November, the economy had recouped only 12.4 million of the 22.2 million jobs lost in March and April.
Bank of America analysts forecast non-farm payrolls growth of just 50,000, leaving unemployment unchanged at 6.7%. They note “concerning signs” in the labour market, attributing them to renewed pandemic-linked restrictions on businesses.
As you could see guys, although we do not have a lot of new driving factors - new details are important. First is concerning vaccination. Recent comments from respectable people above confirms our view that we already mentioned previously. Vaccination comes slowly and will be extended in time so that first results we will get by the end of 2021 at the best. Major reasons for that are threefold - not enough production capacity to produce necessary amount of doses in time, lower efficiency compares to laboratory tests and lower population agreement on vaccination. To get the effect, it is preferable to inoculate at least 65% of population, otherwise effect will be blur. But, according to polls, there is fewer amount of population agrees on vaccine shots, that stands around 40-45%.
Vaccination problems, in turn, makes direct impact on economy as recovery comes slower and Central Banks will have to spend more resources to stimulus. And here we come to very thin moment, a really special nuance of thin balance between amount of stimulus that is possible to provide before inflation starts to rise. Just think, that as longer we have no effect on virus struggle as more stimulus will be provided. This in turn means that inflation gets rising probability. Thus, common sense tells that pandemic has time limit until jump in inflation, right?
Have you thought why Daiwa Securities suggests drop in EUR and GBP by the summer (we've mentioned it above)? This is mostly by inflation expectations that put impact on Fed policy. This is the only reason why trend could turn in foreseeable future. It means that either vaccination should get first positive results to summer and Central Banks should start stimulus contraction, that also suggests US Dollar temporal strength, or - inflation starts to rise dramatically.
On GBP we have another hidden pit. Scotland May elections. This is another reason why Daiwa could suggests cable drop. I suppose that risks are very high that this will happen. Technically we have long-term bearish targets on cable around the parity, but till some moment driving factors stand unclear. Now we see potential ones that could trigger the collapse.
Finally, on short-term situation in the US. As we've said in last report, we suggest that economy data will be poor in IQ of 2021. In 4th quarter GDP will be lower than expected, while 1Q 2021 GDP could be negative. With "Twin deficit" on board this makes unprecedented pressure on Fed and US government to provide more stimulus. This is the reason why we do not expect significant growth of US Dollar until the spring.
Technicals
Monthly
December month shows good performance with minor reaction on COP target and acceleration on CD leg. As 1.25 resistance has been tested already in the beginning of 2018, EUR has relatively free area till the previous top around 1.25-1.2550 level. Overbought area stands around 1.27 and doesn't prevent upward action at all. MACD trend stands bullish, so on monthly chart we do not see any technical barriers for further EUR appreciation. The next target above 1.25 stands around 1.2850-1.30, that is OP and extension of BC retracement swing.
Here we add new pivot levels for 2021, the fulcrum stands around 1.16 that in general agrees with Daiwa's view. Combination of technical and fundamental factors tells that EUR should try to reach 1.28-1.30 area by the end of the spring. Strong technical resistance started from 1.25 area that EUR tries to challenge and hints from ECB that they are worry on too fast EUR appreciation tells that it could intrude as EUR will come closer to 1.30 level. This increases risks of deep retracement on EUR in the II half of 2021. Potentially other factors could join and provide additional pressure, such as contraction of Fed stimulus for example, in a case of epidemic situation improvements.
Finally, drop could happen much sooner if some extraordinary events happen, although now they stand in theoretical rather than realistic group. First of all I hint on possible surprises around US elections debates in Congress. In this case collapse to 1.16 could start right on the next week.
Weekly
Our next weekly target is XOP around 1.2450. It looks realistic as it stands in "performance envelope" compares to overbought range. So, gradually market could try to hit it within a few weeks. As major reaction on OP target is over, by market mechanics, price stands in extension mode as it is going to XOP. It means that any deep retracement here is irrational and only Fib levels of 1.16-1.22 swing are acceptable as pullback targets.
Last week we've taken detailed view on "bearish harami" pattern here. In general it is bearish and suggests downside reaction of different strength - sometimes major reversal, sometimes technical pullback, which is more probable in our case. It is not the hazard to our major tendency to XOP, but it just means that before upside continuation, EUR could show the pullback. For example, it could be re-testing of previous top around OP.
Now situation becomes more bearish as EUR has failed to out of the pattern and shows the W&R of its top. This increases chances on downside action on coming week.
Daily
Daily picture suggests initial drop to 1.21 area on the next week. All our upside targets here are hit - XOP is done, minimum grabber's target is done as well, as price sets new top. At the same time, daily trend has turned bearish, market shows W&R of the top and formed bearish engulfing pattern with sharp downside reversal.
Potentially downside retracement could become more extended and re-testing of 1.20 area support seems very probable. Still, right now we consider only 1.21 level as a target because of daily oversold level that stands around it.
Intraday
So, our 4H butterfly has been perfectly completed. As we do not have clear downside AB-CD's we consider few different targets. First is by the price shape - it might be H&S pattern with neckline around 1.2130-1.2150 that agrees with daily oversold and K-support here. This is our most probable and nearest downside target. Scenario is supported by MACD divergence as well.
Next targets are based on butterfly's ultimate extensions that it possible to use when reversal is forming. Thus, 1.27 extension points on 1.2080 target that agrees with next 1.2070-1.2115 support area, while 1.618 stands around 1.2015 and agrees with re-testing of previous 1.20 top.
Thus, for short-entry is possible to consider minor retracement to one of the Fib levels with stops against the top or far standing Fib levels. At first glance, 1.2245 K-area looks interesting:
That's being said, it seems that within 1-2 weeks EUR could show deeper retracement down as weekly/daily charts show bearish signs. Despite possible pullback we keep intact our medium term view by far, suggesting that EUR is possible to reach 1.28-1.30 target cluster, while major fundamental factors effect lasts.