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Risk sentiment shakes off vaccine concerns

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By Han Tan, Market Analyst at FXTM

Asian stocks are mostly higher on Friday, while US equity futures are also pointing north, as risk appetite tries to overcome concerns over the efficacy of AstraZeneca’s Covid-19 vaccine.

Investor confidence had been shaken after learning about the manufacturing error in the drugmaker’s vaccine trials, prompting Thursday declines in European equities, Oil prices and even Bitcoin. Early Friday, markets are pressing ahead with the risk-on narrative, while the Dollar and Gold edge lower.

Since the US elections, traders had been pricing in a picture-perfect, post-vaccine world. The positive developments surrounding the three leading vaccine candidates formed a metaphorical three-legged stool on which risk appetite rested. But signs that one of those legs could be coming loose, given the unsettling AstraZeneca revelations, triggered a wobble in risk assets.

The market reaction of late underscores how sensitive investor sentiment is to news surrounding the Covid-19 vaccine. Positive developments this month have translated into eye-popping gains in beaten-down sectors such as energy, financials and even mall-based retailers, with the Dow Jones index posting a new record high. Of course, any dent to that rosy post-pandemic outlook has the potential to trigger risk aversion, as seen in the latter part of this week.

Still, investors are hoping that the promise of a Covid-19 vaccine will come good, with the US Food and Drug Administration set to convene on December 10 to discuss the emergency use application for the Pfizer and BioNTech’s vaccine.

As long as those approvals happen without a hitch, that should ensure a supportive environment for risk assets to climb higher going into 2021, with the global rollout of the vaccine set to bring the world closer to pre-pandemic life.

 

Gold bulls waiting to catch a break

In the meantime, Gold prices have continued to struggle under the weight of the risk-on sentiment evident for much of November, with the top Bullion ETF set to record its highest monthly outflow since 2017. The climb in US Treasury yields since August, coupled with the Dollar index’s refusal to capitulate below the 92 psychological level, have also contributed to the 12% decline from Gold’s record high.

Traders will be closely monitoring how strong Gold’s 200-day simple moving average around $1,800 will be as a key support level. It remains to be seen whether Gold bulls can gather enough mass to keep prices supported, as they continue pinning their hopes on an overshoot in US inflationary pressures, aided by fresh rounds of fiscal and monetary stimulus.

The relenting of such expectations could then translate into a sustained presence below $1800, as investors rotate out of the precious metal into other asset classes that are currently in vogue, such as equities.

 

Oil awaits crucial OPEC+ supply decision

Brent futures are holding steady following Thursday’s drop, as investors cling on to expectations that next week’s OPEC+ meeting will result in pushing back plans to ease their supply cuts by three months, despite signs of tensions within the group of major Oil producers.

Both Brent and WTI futures are still on course for a fourth consecutive weekly gain, ahead of the crucial decision due at the meeting which starts on Monday.

Should the cartel press ahead with bringing 1.9 million barrels a day back into markets in January as intended, that would deal a nasty shock to Oil and bring the benchmark back down closer to $40/bbl for Brent. A shorter delay of less than three months could also prompt Oil prices to unwind some of its November gains.

Nevertheless going forward, Oil prices should enjoy enough support from the optimism surrounding the Covid-19 vaccine.

 

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