US equities started to scratch out a small gain in late trading Thursday. Then sentiment took a tumble in the after-hours markets, caused by an apparent clash between the US administration and the Fed over unused funds from the Federal Reserve's emergency lending facility. The White House wants to pull the unused portions back so Congress can spend the money elsewhere, while the Fed is pushing back. Indeed, this doesn’t help the push-pull tug of war around short-term versus long-term markets narrative at a time when it’s important that all levels of government – including the Fed – at least put up the pretense of a unified front.
Ironically it was tech stocks that initially drove the turnaround, aided by hopes of a resumption of fiscal stimulus talks after Senate minority leader Schumer indicated Republicans had agreed to restart negotiations. US10Y yields fell 2bps to 0.85%, oil was down 1.1%.
But then the double does of harsh reality set in when California effectively instituted a statewide stay-at-home mandate as more than 40 counties are in the 'purple /widespread ' Covid zone.
The market has continued to find decent support around current levels on S&P e-mini futures (3550); it's Friday and difficult to gauge investors' appetite to re-risk into the weekend where now the Monday headline Covid blues come back in play as we see the re-lockdown narrative could only be the tip of the iceberg impact on consumer sentiment.
President-elect Biden has reassured the market today that the US will not go into a nationwide lockdown. Still, it’s the pernicious influence of the virus over how we live our lives and integrate within society that becomes the great unknown for investors. Sure, we shop more online, but the virus's downstream impact on the big city job market – especially the huge US urban centers – is likely irreparable, and for that the vaccine cannot provide a cure.
It’s been an incredibly trying week for investors as emotions ranged from the emotional peaks of vaccine exhilaration to the depths of Covid-19 despair.
Consumer sentiment under pressure
Consumer sentiment is clearly under pressure as folks are now forced to delay the time until they return to normal activities, causing investors to dial down their near-term employment expectations.
Since the US election, the SPX has moved in a meager 100-point range as investors struggle to look through the staggering Covid-19 case count explosion around the world while awaiting widespread vaccine distribution, perhaps in mid-2021.
Monday's vaccine headlines triggered the on again, off again debate regarding the great rotation trade's probability and timing. But arguably the macro risk-reward continues to look poor given the stalling US economic recovery, with new lockdowns and lower stimulus expectations making an enduring rotation out of high-quality momentum leaders unlikely in the near-term, suggesting the risk of a further pullback is a huge concern for investors.
Not only are re-lockdowns a risk to the view, but with investors keen to mitigate year-end risk and protect profits by de-grossing leadership names, it’s no longer just a buyer’s market as investors will use upticks to reduce risk into the year-end – especially if we continue to trade within this post-election 100 pips range.
Next big thing
The next catalyst on the radar to propel the vaccine narrative is AstraZeneca's efficacy (AZ). However, these are not expected until late December/early January. Therefore, investors are likely to find themselves in a bit of range, pending the reopening trade in 2021 on a combination of re-lockdown fears and year-end de-risking, but the worrying risk skew does point lower.
AstraZeneca is essential to Asian economies as almost all countries in the region, excluding the Philippines, Malaysia and Taiwan, have a deal with AZ; AZ has also made large commitments to COVAX. The low cost per dose ($3) and less demanding storage requirements make it much more friendly for EM countries, and AZ's production capacity is also the largest amongst global vaccine candidates, at 3 bn doses by next year. Indeed, many Asian countries (India, Korea, Thailand) have local production arrangements for the AZ candidate in place, which will increase the scalability of its distribution. AZ may release results on its clinical trials later this year, and EM countries and their currencies – including Asia – will react with greater gusto to positive news from that release.
Oil markets trim weekly gains as the virus surge throws a wet blanket over vaccine optimism.
Oil had managed to shrug off the mixed US inventory data, signs of tension within OPEC and more worrying news on the spread of Covid-19. Well, that was until the double dose of oil market trouble hit as the White House and Fed squabbles fused with the state of Californian re-lockdowns.
Oil is now tumbling on worrying news of the staggering spread of Covid -19 in the US, which could ultimately trigger more stringent lockdowns post-Thanksgiving holiday when the virus is expected to surge. The latest re-lockdown news in California is worrying as that’s a colossal road fuel consumption state.
And if you needed a reminder of the lockdown impacts, adding to the gloom was US jobless claims which rose for the first time in five-weeks.
Still, I think OPEC+ backstops effectively bookend the market on the downside, and Covid re-lockdown fears will trim bullish activity above WTI $42.
Still, crude oil is up almost 3% on the week as sentiment has been supported by the positive news on Covid-19 vaccines and the commentary emerging from OPEC meetings earlier this week. The key takeaway from the OPEC JTC and JMMC meetings on Monday and Tuesday was the recommendation that OPEC+ cuts be extended for three to six months. While this had been unofficially discussed for weeks and the market had been leaning on this backstop, nonetheless it was positive to get confirmation that an extension is factually being considered. No formal decision will be taken before the full OPEC+ ministerial meeting at the end of this month. Still, with the rise in coronavirus infections and new mobility restrictions, it seems like a rubber stamp likelihood that an extension will be needed to support sentiment, tighten the market and avoid a pullback in oil prices.
The Malaysian Ringgit
The ringgit remains tethered to the Covid-19 yo-yo string. For any country with a sizable oil export quotient, its currency feels the ups and downs of the choppy oil market. With another California stay-at-home lockdown alert, risk traders will likely need to price defensively into the weekend, so I would expect the ringgit to trade on a defensive axis as well.
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There’s a palatable disquiet brewing in market circles as questions get raised over the AstraZeneca -Oxford vaccine data.