We’re moving from the chaos on Capitol Hill to cash handouts ringing the New Year till; it’s fiscal infusions – not markets grandiose delusions – to glide the economy back to the pre-virus path.
The first order of business for the Biden administration and Democratic Congress is likely to be another tranche of Covid-related fiscal support. The street expects a massive infusion either side of 1 trillion in Q1 that’s built around further stimulus checks, funds for state and local governments, and enhancements to unemployment benefits, among other provisions.
The big picture in US equities seems to be that 'blue wave' election themes are here to stay, and will be tough to fight with cyclicals and tech rallying side by side. Short selling activity has completely backed off and, with most of the tail risk now in the rear-view mirror, the VIX is coming down. Naturally, fresh money will flow back to the market as volatility suppresses.
Investors remain super bullish about the prospects for US equities in 2021. Effective vaccines mean consensus is aligned to a surge in economic activity and strong profit recovery.
Will post-pandemic economies see a roaring 2020s recovery including an inflation surge, or will secular stagnation continue to dominate?
Vaccination rollouts and herd immunity are hard to predict but look plausible on the near-term horizon. But the great unpredictability in human behaviour once the virus threat fades remains a question mark. To me, the most tenable scenario is one where pent-up consumer demand explodes at the end of Q2 as the vaccine allows more activity and movements from point A to B – and you’ll have to add T to the equation as travel will pick up big time, thereby temporarily overwhelming the supply of all goods and driving up short-term inflation.
To a large degree, oil markets continued to mimic broader markets trading off the same the US stimulus impulse while treating the latest Covid-19 scare as nothing other than a speedbump thanks to the stimulus and vaccine look-through narrative.
WTI and Brent front month futures consolidate but trade-off best in show 24 hours levels, as the former briefly topped USD 51/bbl and the latter coils around USD 54.50/bbl, with prices underpinned by the OPEC+ meeting earlier this week as Saudi Arabia aims to keep a lid on supply and positive mood music amid expectations of greater stimulus following the blue sweep in the Georgia Senate run-offs.
This shift in supply/demand balance expectations is clear in the Feb21/Jun21 WTI spread which closed the year at USD0.11 contango and is now trading at USD0.25 back (Feb21 over Jun21).
The annual rebalancing of major commodity indexes starts tomorrow, which will unquestionably keep a bid under oil futures which are still in catch up mode to its hard commodity and industrial metal peers.
Oil price stability is quite astonishing when considering the oil demand Q1 economic write-downs. The new and more contagious variant of the virus places a bigger burden on hospital resources. As the virus spread, hospitalizations are likely to remain high, especially among lower-risk groups who will not be vaccinated until the campaign's tail end.
As a result, state mobility restrictions will remain tight in Q1. Still, it's consumer behaviour where the impact is felt the most as many households are likely to continue to avoid consumer services requiring any direct contact or interaction.
But we must bear in mind that viruses will mutate and the UK variants have been around for months, not weeks. The biggest problem might be the current lockdown measures are far too much in the infancy stages to ease the healthcare infrastructure concerns in the immediate future.
However, if we don’t have definitive news that vaccines won’t work against variants, traders will buy the oil market dips knowing the vaccinations are our only way out of the Covid abyss in 2021.
The US Dollar
The USD is stronger this morning against other G10 currencies, even though a generally "risk-on" mood in other markets is taking hold. The market conversation around US monetary policy appears to be drifting towards tapering timing.
And while you could give the USD resilience in the face of a "risk-on" mood a fundamental rationale around expected US growth exceptionalism, an equally good argument could be made that it's little more than traders experiencing a bout of FOMC mind games and more likely reflects day-to-day noise in a directionless start to 2021.
The EUR is weaker this morning as the data releases show the economy's mixed outlook amid the latest Covid-19 containment measures.
The Malaysian Ringgit
The Malaysian ringgit is suffering a domestic Covid-19 case count recoil after registering the highest daily new case tally breaching the 3000 markets and raising the alert level to the reinstatement of MCO restrictions, and with uncertainty building over the Fed’s willingness to step in to curb an aggressive UST curve bear steepening that would leave high and moderate yielding EM currencies vulnerable to higher US yields.
The Chinese Yuan
We’re getting a double dose of pushback on the surging yuan as local Chinese banks have yuan of sale which looks highly likely to be steady window guidance by the PBoC. And when you factor in the Fed tapering plans' uncertainty, it's sent more than a few Asia dollar bears back into a temporary state of hibernation.
The Japanese Yen
The yen has weakened following some comments from a Japan Ministry of Finance official referring to the exchange rate, sending the dollar bears on a short-covering frenzy. Note that back in December, PM Suga was quoted as saying to MoF officials: "make sure the yen-dollar exchange rate does not cross the 100-yen mark" (Nikkei).
I doubt officials would be willing to put a firm barrier at 100. As the yen remains undervalued, currency moves have been far from disorderly, which is the G5 threshold for justified intervention – not to mention that currency intervention remains very unlikely with a new US administration coming in.
Taper Tantrum in Forex Land?
Positioning suggests global investors are short dollar big time and the issue for those dollar shorts is if we get a meaningful upgrade to the growth and labour markets this year it pushes forward Fed QE tapering to year-end. Strong US growth leading to an early tapering narrative is where the confusion lies for FX traders.
But forget “taper” as the word of the day – it could be the word of the year in Europe and the US. Comments from Bundesbank President Jens Weidmann that the ECB must ensure the emergency tools don't turn into permanent features is a reminder there will be plenty of heated discussions in Frankfurt over the next few months.
All the 2021 tapering talk has taken some of the gusto out of gold markets. On the other hand, this could be another case of too many cooks in the FOMC kitchen, and Clarida will set things straight. Either way, the importance of Clarida's speech tomorrow has gone from a 1 to 10.
The Fed's change in language is naturally unnerving dollar shorts, but it's not 100% clear this is a real thing yet. Also, real yields have barely moved, which is more important for gold than nominals in the current regime. The strong US growth that leads to early tapering is a confusing one for FX; let's see what the Vice-Chair says before jumping the gun on this one.
In the meantime, look for gold price to remain tethered to the US dollar on a very short leash.
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US stocks appear to have reached a mini cyclical fatigue point, but the pace of vaccinations remains the key driver for risk markets