Slow Bleed

The dollar moved higher from a 29-month low Thursday, as risk-off vibes tied to America’s COVID epidemic weighed on sentiment.

Market participants are concerned that a post-Thanksgiving surge in cases stateside could ultimately lead to even more stringent measures across the world’s largest economy, even as analysts and economists are loath to suggest a double-dip downturn is possible, let alone likely.

Incremental vaccine news did little to improve the mood. The University of Oxford said its COVID-19 vaccine, developed jointly with AstraZeneca, produced an immune responses in the elderly, a finding The Lancet’s editor-in-chief called “a very important step” during remarks to Bloomberg TV. Additional results from the shot’s late-stage trial are due within weeks.

Russia passed the two million case mark, while Tokyo raised its alert level to the highest tier. In South Australia, officials have instituted a draconian lockdown. Dog-walking is banned, for example, as are funerals. For the next six days, only one member from a household can leave, once per day, and only if there’s a good reason. That is reminiscent of how China handled the situation in various stages of its own lockdown. Premier Steven Marshall said he’s determined to “go hard” and “go early” so that the region can “get out… as quickly as we can.”

That’s the opposite of the strategy adopted across the US, and the results reflect that. I’m not advocating for either approach, but the fact is, this virus can be totally eradicated — at least for a time, vaccine or no vaccine. It just depends on community discipline. Discipline and a sense of community long ago ceased to be cornerstones of American life.

In a testament to the slow bleed in sentiment, the MSCI Asia Pacific Index fell for the first time in 14 sessions, snapping the best streak in more than three decades.

It’s hard to see how yields can possibly sustain any kind of serious upward momentum against a backdrop that finds the world spiraling back into virus lockdowns.

The bounce in activity seen in Q3 is probably durable for China and perhaps other Asian economies, but a double-dip is penciled in for Europe. Sooner or later, folks will start asking questions about Q4 in the US.

The gap between 10-year yields on China’s government bonds and benchmark Treasurys now sits at a record around 250bps. Some of that is down to the knock-on effects from credit jitters in China, as institutions sell their liquid assets to raise cash, but the spread is notable.

“Increasing speculation about possible further monetary policy measures by the Fed is holding down US Treasury yields,” Rabobank’s Philip Marey wrote Thursday.

“Despite the improving outlook for COVID-19 vaccines the virus is surging and we still have to bridge the period until vaccination can be rolled out,” he added, noting that “although the Fed is politically neutral, and Powell a Republican, the FOMC would be helped by two Democratic victories in the Georgia runoff elections for the Senate on January 5 [as] this would open the door to a large fiscal stimulus package… reduc[ing] the burden on monetary policy.”