Hopes of virus vaccine send risk assets higher

A generally more upbeat tone swept through financial markets on Wednesday, sending stocks and risky currencies higher and safe-havens such as the US dollar lower.

In an environment with no real direction in the market, investor sentiment has shifted fairly abruptly in both directions of late on the smallest of news headlines. Reports that an early human trial for a COVID-19 vaccine in Germany had yielded positive results was enough to buoy the market yesterday. While a final vaccine remains some way off, the mere hope that one could be found in the not too distant future is providing plenty of impetus for rallies in risk assets such as equity markets and emerging market currencies.

The economic newsflow also continues to provide reason for optimism that the recovery in the global economy could be closer to a ‘V-shape’ than the market had anticipated a few weeks ago. Business activity data out of the US yesterday was highly encouraging, with the ISM manufacturing PMI unexpectedly rising back above the level of 50 that denotes expansion. The ADP employment change number, which represents that net jobs gained or lost in the US private sector, also provided reason for hope. While the June number fell short of expectations, the May data was revised sharply higher from a near 3 million contraction to a 3 million gain in jobs.

Next up for the dollar will be this afternoon’s nonfarm payrolls report. Given the strength of the ADP report, another positive month of job creation with upward revisions to the previous months data looks likely. The market is currently eying a job creation number of around 3 million, with the jobless rate expected to have eased back to 12.3% last month.

Sterling extends gains as Brexit risks recede

The broad sell-off in the dollar allowed EUR/USD to make a march towards the 1.13 level yesterday, with sterling up another one percent or so to around the 1.25 mark.

Last night’s FOMC meeting minutes were actually largely overlooked by the market, despite policymakers reiterating that a negative interest rate policy in the US was unlikely. The euro was instead supported by an upward revision to the June manufacturing PMI and much better-than-expected German labour and retail sales data. The latter posted its biggest monthly jump on record, rising by 13.9% month-on-month in May following a record contraction in April.

Sterling, meanwhile, continues to receive good support, now up almost 2% in the past couple of trading sessions. There has been no real catalyst behind the move, aside from the broad improvements in market sentiment. The lack of bad news on the Brexit front in the past few days has, however, raised hope that some sort of deal between the UK and EU is more likely than not before year end.