Bitcoin and the great market conundrum: Vaccine vs. infection rates

Market outsiders may assume that multiple pharma giants all producing positive results for their covid-19 vaccine trials would be good news for markets and could trigger a prolonged market rally. However, that is not the way that markets work. As more news has arrived this week about positive results from vaccine trials by Moderna, and Oxford University and Astra Zeneca, market sentiment has dipped. US stocks fell more than 1% at the end of Wednesday’s session and European stocks are down approx. 0.7% so far today. While this is a small pullback compared to last week’s gains, the euphoria over the vaccine news appears to have been short-lived. We are now in a situation where the vaccine news is in tension with rising Covid infection rates and the latest round of lockdowns that have been announced in the US. 

Lockdowns are kryptonite for market sentiment 

Lockdowns and the threat of government- ordered economic suppression tends to spook traders and investors. Back in February and March, as lockdowns were being planned by governments around the world, global stocks shuddered. Within a few weeks they started to recover, particularly in the US, and we expect any sell off this time to be short-lived. The US is playing catch up with Europe and seeing record infection rates which have triggered state-level lockdowns. This caught the market off guard; for example, the news on Wednesday night that New York was closing its public schools spooked the market. If the US is locked down once more, especially as we lead up to the important retail season of Thanksgiving and Christmas, then hopes of a US economic recovery saving the global economy could start to fade. Thursday’s economic data did not help matters. US initial jobless claims were higher than expected for last week, which is adding fuel to the fire that the second wave of the pandemic will trigger another beating for the US economy. Although a vaccine is close, it is still too far for financial markets. For example, it may not be able to save the economy for the next couple of quarters, and that is about as far into the future anyone is trading right now. Hence why Thursday’s fall in stocks is a reflection of two things: 1, that last week’s stock market rally on the back of the covid vaccine news was too much too fast, and 2, that the economic future is not as bright as some had though this time last week. 

How far will the market sell off? 

Although markets are lower on Thursday, the sell-off has been mild so far. Volatility is also stable, indicating that the market direction is not ready to change, and thus after a pullback the uptrend for risky asset prices could still be intact. The dollar index is mildly higher today, however, dollar gains could be capped as the market starts to price in more Fed support, potentially in December, to lessen the economic blow from a second wave of covid. Gold is also a touch lower after failing to recover from last week’s sell off. This is also good news for the market bulls, if gold starts to rise then it could be a sign that investors are ditching risk and switching back into safe havens. This is not the case right now, indicating that investors are not as worried about the latest covid numbers in the US and that prospects of a Vaccine could act as a market put, and limit future volatility as we move into the end of the year. The gold price is currently testing last week’s low at $1,857, if this level is breached then the next key support level is just below $1,800, the low from June. The technical signals suggest that there could be more losses to come for the gold price as the effect of the vaccine starts to make investors reallocate their capital away from safe havens for the long term.  

Fresh record highs beckon for Bitcoin 

Bitcoin is surging once again. One may have thought that Bitcoin would react badly to vaccine news because it heralds a potential return to normal for the global economy, less central bank stimulus over the long term and thus less erosion in the value of money. However, a vaccine could push the dollar lower over the long term, some analysts are saying up to 20% lower in the next two years, and this has been enough to drum up enthusiasm for bitcoin once more. Currently it is trading above $18,000, a 50% jump in less than a year. There are indications that this rally could surpass the record set in 2017 when it jumped above $19,000. Back then the rally was mostly driven by retail investors, this time around real money, or institutional investors such as hedge funds are involved, and this is why some analysts think that any sell off will be short term, and that the rise in bitcoin is here to stay. Due to historical levels of volatility in Bitcoin’s pricing, we would always urge caution when trading crypto.