Vaccine Optimism Boosts Risk Appetite, Kiwi, Aussie Outperform

Summary: It was a classic case of risk-off, risk-on as promising signs from a US coronavirus vaccine trial on humans emerged. Moderna Inc., a US biotech company announced yesterday that its human trial for the coronavirus produced antibodies for Covid-19 in all 45 participants. Which saw the company’s stock price surging 22%. Meantime Federal Reserve Chair Jerome Powell said that the US economy could shrink between 20-30% in the second quarter but a depression is unlikely in an interview with 60 Minutes. Wall Street stocks lifted. The DOW jumped 4% to finish at 24,565 (23,665). The S&P 500 rallied 3.45% to 2,952 (2,860). In FX, the best performers were New Zealand’s Kiwi, up 1.9% to 0.6040 (0.5935) and the Aussie Dollar, 1.78% higher to 0.6525 (0.6415). The antipodeans were also buoyed by comments from Chinese President Xi who said that they did everything in their power to provide information on the crisis. China also pledged US$ 2 billion to help other countries fight the coronavirus outbreak over the next 2 years. Xi, speaking at the World Health Assembly, said that China’s Covid-19 vaccine development “will be made a global public good”. Vaccine hopes and climbing demand saw Oil prices gain. Brent Crude lifted 9.2% to US$35.65 (US$33) while WTI climbed 8.7% to US$32.30 (US$29.80). Against the Canadian Loonie, the US Dollar fell 1.18% to 1.3950 (1.4112). The Dollar Index (USD/DXY) a gauge of the Greenback’s value against a basket of 6 foreign currencies, retreated to 99.62 from 100.36 yesterday, down 0.76%. Sterling, under pressure for most of the day, lifted 0.9% to 1.2195 (1.2105) on the broad-based US Dollar weakness. The Euro rebounded to finish up 0.95% to 1.0915 (1.0815). German Chancellor Angela Merkel and French President Emmanuel Macron unveiled a proposal for a EUR 500 billion coronavirus recovery fund to help the EU’s worst hit nations.

Global Treasury yields were higher. The benchmark US 10-year bond rate jumped 9 basis points to 0.73%. Germany’s 10-year Bund rate was last at -0.47% from -0.54%. Japan’s 10-year JGB yield was unchanged at -0.02%. Australia’s 10-year bond rate was also unchanged at 0.90%.

On the Lookout: A vaccine that works in battling the Covid-19 outbreak is the world’s biggest hope today. Moderna’s positive report in the early stage of its coronavirus vaccine results in human trials at a time when governments around the globe are lifting lockdown restrictions and opening businesses boosted risk appetite. The Cambridge, Massachusetts company also said that if all goes well a vaccine will not be ready for the market until early 2021. Meantime, in its battle for one-upmanship with the US, Chinese President Xi Jinping said that their Covid-19 vaccine development and deployment will be made a public good when it is available. Markets will focus on these developments today. Data released yesterday were light. Japan’s Preliminary Q1 GDP contracted to -0.9%, bettering forecasts of -1.1%.
Today kicks off with New Zealand’s Q1 PPI Input and Output. Australia follows with the release of the RBA’s latest Monetary Policy meeting minutes. Japanese Revised Industrial Production rounds up Asian data. UK Employment data follow with UK Claimant Count Change (Unemployment Claims), Average Earnings Index (Wages), and Unemployment rate. Europe sees German and Eurozone ZEW Economic Sentiment Indexes. US data releases are its Building Permits, Housing Starts. The G7 satellite meeting to discuss the measures to mitigate the economic impact of Covid-19 is main event.
Federal Reserve Chairman Jerome Powell testifies before the US Senate Banking Committee on the coronavirus aid and relief (12 midnight Sydney).

Trading Perspective: The pattern of risk-on, weaker US Dollar continues. There are, however, risks that are still evident. The company that makes the promising vaccine said that if all goes well a vaccine will not be ready for the market until early 2021. In FX, it’s a long time until then.
US bond yields jumped overnight with the 10-year bond yield up 9 basis points. US 30-year rates climbed to 1.44% (1.27%), up a whopping 44 basis points. Other global bond yields were either flat or their rallies were not to the extent of that of the US.

CNBC US30Y Bond Yield Chart - 19 May 2020 (1)
CNBC US30Y Bond Yield Chart – 19 May 2020 (1)

The US-China trade war is ongoing and will remain in the spotlight with other developments. A pullback in the US Dollar is likely from current levels. We look at the various currencies. The spotlight will fall on Jerome Powell’s second testimony before the US Senate banking committee on the Fed’s outlook for further stimulus and possibly negative rates.

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