Market Minutes Overview:
- COVID-19 infection rates are increasing, but hospitalizations and deaths are not, leading to the conclusion that it’s unlikely to see widespread lockdowns again.
- The US Dollar (via the DXY Index) established a bearish daily key reversal yesterday, drawing into question the validity of its bullish breakout attempt.
- After the ECB meeting, the economic calendar quiets down for the rest of the week, although next week should bring more fireworks.
Another Brick in the Wall
Let’s stick to the facts. The COVID-19 vaccines are not medicines, which by definition “treat or cure diseases.” Vaccines “help prevent diseases,” an important distinction. Why does this matter?
Because data coming out of some of the world’s developed economies with high adult vaccination rates suggest that the vaccines are working as intended: tail-risks have been reduced, with hospitalizations and deaths falling relative to the recent spike in infections (which have been occurring primarily among the unvaccinated at this point).
Put another way, vaccines are like a Kevlar vest for the immune system; while they don’t make you bulletproof, they dramatically increase the odds of surviving an adverse event.
One way to validate this perspective is to take a look at a measure known as ‘excess mortality,’ which is a way to quantify “the number of deaths from all causes during a crisis above and beyond what we would have expected to see under ‘normal’ conditions,” per Our World in Data (the source of chart 1 below).
Excess Mortality: Israel, the UK, & the US (March 2020 through June 2021) (Chart 1)
Using the period of 2015-2019 as the baseline, we can see that excess mortality spiked in spring 2021 in Israel, the UK, and the US, and again in winter 2020/2021. But at the turn of the calendar year, vaccination rollout began in earnest, and excess mortality dropped thereafter.
In fact, relative to the 2015-2019, the data from Israel, the UK, and the US showed that excess mortality had basically disappeared from the data as of June 2020. There’s only one possible conclusion: the vaccines are working.
So while COVID-19 infection rates are continuing to increase in developed economies as loud choruses of the population channel their inner Pink Floyd, belting “we don’t need no education,” for financial markets, the spread of the delta variant is just another brick in the wall of worry.
The ‘threat’ of lockdowns will persist, but I will go out on a limb to say that they will never materialize in countries with access to vaccines; there won’t be another economic swoon like in April and May 2020. More importantly for financial markets, it’s a convenient narrative to keep the stimulus spigot open for the foreseeable future.
Video Technical Notes: DXY Index
- The DXY Index’s bullish breakout is running into trouble. Yesterday’s price action formed a bearish daily key reversal, bringing the DXY Index back below symmetrical triangle resistance in place since last September. Failure to take back bullish breakout territory – which, given the early-July consolidation, called for a targeted move to 93.70 in the near-term – would portend to more choppy range trading for the greenback
Calendar Quiet for a Bit Longer
The July European Central Bank meeting has come and gone, and while ECB President Christine Lagarde may have tried to have her own Draghi-esque “whatever it takes” moment by promising “permanent accommodation,” the net-result for FX markets has been a wash. After all, interest rates markets have pushed out expectations for the first ECB rate move to 2025; how much more dovish could they get?
Through the end of the week, there is but one high rated event on the economic calendar. To be fair, tomorrow is global PMI day, which means there are a slew of medium rated events that should introduce isolated pockets of volatility across the majors.
DailyFX Economic Calendar, ‘High’ Rate Events, Next 48-hours (Table 1)
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
