US equities traded mostly sideways on Monday, supported by talk of more vaccination rollouts and discussion of a bipartisan $908 billion US relief bill to be unveiled. But the broader indexes sold off relatively hard into the close in a case of “buy rumour, sell the facts”. Indeed, it seems like investors are reacting in a day late and a dollar short fashion with both the US employment situation and Covid-19 spread shackling the economy due to a state of lockdown siege, suggesting Congress needs to do much more – especially with New York lockdown headlines playing a major factor.
Again, it feels like we’re stuck in the negative feedback loop. Unless policymakers overdeliver on market expectation – especially at this time of year when our risk-taking proclivities give way to profit-taking – it seems virus-related economic restrictions will never cease to weigh as the market counties to straddle that fence between hope and reality.
And while the vaccine heralds a return to normalcy, just how quickly folk will embrace that reopening normalcy remains the great unknown. Still, one would think that over time, as the virus fades from memory, people would be happy to return to past behavior. The problem with that is whether the services and amenities that make high density living appealing to some can last that long. While consumer preference might be temporary, it could become permanent if cities become much less attractive places in the meantime.
Last week's pullback in risk had markets primed for yesterday's recovery as progress resurfaced in Brexit and stimulus against a backdrop of vaccine distribution commenced in the US. Brexit talks will now be extended once again, with EU chief Brexit negotiator Barnier saying a fishing compromise could open the door for a deal.
It’s starting to feel like Christmas trading is beginning to kick in despite some Brexit and US stimulus risks. Exchange volumes remain fairly depressed as trader fatigue becomes a factor and investors turn predictably more selective and defensive to protect profits. Keep in mind this is likely the real last week of liquidity this year, culminating with expiry and rebalances on Friday.
The US has started rolling out the Pfizer vaccine, with health workers among the first recipients. Officials have indicated they expect 40m doses of the vaccine will be distributed by the end of the year. Indeed, this is a great start for the rollout process and should continue to provide some downside inoculation to overall market risk sentiment, given the horizon looks rosy with the world in chorus screaming out, "Dear Future, I'm ready now."
Until the last few hours of trading in New York, risk assets point to a constructive start to the value trade this week. Commodity strength continues; Energy overtook real estate to be the 10th largest S&P index weight (as of the end of last week), having been bottom of the pack for quite some time, while retail investor-led ETFs including Energy Select Sector SPDR Fund, the SPDR S&P Oil & Gas Exploration & Production ETF, and the SPDR S&P Metals & Mining ETF all traded well. European equities are trading well on Brexit developments, despite more Covid-19 lockdowns (Germany being the most notable)
Oil markets are being viewed as an overall bellwether to the market reopening sentiment as this year's negative year-on-year base effect will most certainly give way to Q1 exuberance. But even oil still had a bit of a bumpy ride overnight, pressured from lockdown sieges on both sides of the pond and some less optimistic demand forecasts from OPEC and company.
Oil traded up in Asian trading and through the European morning, with Brent and WTI rallying to $50.80 and $47.44, respectively. Hopes of more vaccination rollouts, the possibility of a coronavirus stimulus being agreed in the US, and possible tensions in the Middle East due to a terrorist attack on a tanker in the Saudi port of Jeddah all brought support to prices. However, the market started selling off after OPEC revised down projections for global fuel consumption for the first quarter of 2021. The market pared losses before the close.
Having broken Brent $50 on Thursday last week (a massive momentum shifter for oil markets), the crude oil price has hung on that significant level. Despite soft rolling lockdown concerns on both sides of the pond, the approval of the Pfizer/BioNTech vaccine for emergency use by the US FDA on Friday, and its rollout from Pfizer manufacturing facilities on Sunday, continues to find a bullish echo in the oil market. Meanwhile, the reported attack on an oil product tanker in Jeddah's Saudi port will serve as a stark reminder of the potential for more significant disruptions, should militants actively pick up after a period of relative calm.
But signs of rally fatigue are setting in as buy volumes show less of an appetite above Brent $50, suggesting the market is nearing both sentiment and actual supply and demand equilibrium where oil price reality has quickly caught up with emotion. And IEA and EIA release their expectations reports this week. which could also provide a more somber demand reality check.
The Arb remains wide at -$3.22; to put this into context, Brent's premium over WTI was only $1.57 in the second half of October. In the rally that ensued with the vaccine announcements, Brent gained ground due to its global benchmark role and OPEC's intervention.
Most oil traders have been wholly focusing on uneconomical gasoline crack of late. Refiners can turn a profit when the relationship between WTI and gasoline is over $10 a barrel. In the summer, the front RBob crack rallied to then weaken again to below $10 and has remained around $8 a barrel for the last couple of months. Q1 prices stay below $9 a barrel; however, from Q2, the relationship shoots above $13 a barrel. Hopes for a return to normal are getting priced to stimulus perfection in Q2.
The pound went fishing for the big whopper of a deal but ended up with minnows as all fishing channels appear to be leading to an Australian type relationship. As after Christmas cheers set in over Brexit, it's back to brinkmanship at its best as the UK is now apparently denying there has been any progress.
Although well off overnight highs, the pound is back to pre-Barnier headline levels at the start of trading in Asia. Traders tried but struggled to reapply the risk appetite that the FX market took off the table ahead of the weekend. With talks underway again, so are the multitude of Brexit headlines that continue to present the most challenging risk sentiment contours.
EURUSD had traded back near its recent highs, buoyed by the risk-on mood and content to ignore further Covid-19 containment measures in Europe. The single currency is echoing the global markets' overall risk biases rather than any significant impact from the ECB meeting.
Traders might square up EURUSD shorts ahead of FOMCs as no one would want to stay long US dollars just in case the FOMC delivers a dovish message, which would open the door quickly for further dollar weakness in Q1 where even the most ardent Euro bears will likely concede.
US monetary policy could steal much of the Brexit limelight this week as markets look for "forward guidance" around the FED's asset purchase program. And it seems that traders are trading the pre-FOMC meeting a bit cautiously as, up until this point, the Feds have given no clear signal on whether they could extend asset purchases, making this potential outcome a 50:50 proposition. And traders hate those type of odds.
To a small degree, the dollar bears will need to keep an eye on the FOMC this week as the Fed speak started to sound a tad more hawkish from a low base (vaccine optimism and mention of taper, even if to say it will not happen anytime soon), But the gnarly jobs data and the poor outlook for the employment sector, where no one seems to have a solution, should keep the Fed on the "lower for longer" course as far as the eye can see.
The Australian Dollar
The AU$ is trading a bit lower but not significantly worse for the wares. In China, iron and coal markets were in the headlines after concerns over official intervention in the market. The China Iron and Steel Association called on regulators to crack down on potential illegal activities amid fears the market has run ahead of fundamentals and is dominated by speculation. Thermal coal prices also slid after the National Development and Reform Commission moved to cap prices and approve increased imports. However, the approval for increased imports did not extend to Australia.
But I think the greater concern for commodity linkers is if we’re incorrectly digesting the commodity upswing as a super cycle, rather than for what it might be worth, which might reflect supply chain disruption or, in oil’s case, OPEC interventions.
The Malaysian Ringgit
The Ringgit has traded a touch weaker as the furious oil rally has temporarily run out of steam on the less bullish demand outlook for OPEC. While the reflationary news flow (vaccine and fiscal) remains favorable, the surge in portfolio flows propelling Asian currencies since early November seems to be subsiding with some central banks on guard against high currency strength. Still, I think the catch-up plays in the MYR cleaner tactical plays to position for a sustained rise in oil prices in 2021.
Gold has veered on a defensive tilt, caused by the US rollout of the Pfizer Covid-19 vaccine. The FDA and shipments' final clearance had an immediate impact on gold, undercutting its safe-haven appeal and undermining the rest of the bullion complex in the process.
The gold market is subject to several brawny influences near term, some of them offsetting. The impact of the vaccine rollout is gold bearish and may continue to be near term. But it’s also fair to say that a vaccine rollout in 2021 has been talked about for months, so how long it will dominate gold is hard to say.
And, as with the FX markets, US monetary policy may regain the limelight this week as markets look for "forward guidance" around the high wire asset purchase program. FOMC meetings could temper activity prior but might have a bullish impact on gold if the Fed over-delivers. The problem is the Feds have given no clear signal on whether they could extend asset purchases, making the potential odds of an outcome a 50:50 coin toss proposition – and traders hate those types of odds.
As we said last week, it’s best to let the vaccine dust settle and then trade the dollar bounce. So far, the US dollar has been a non-reactive function, but it should ultimately kick in. On balance, I think gold may stay on the defensive pre FOMC, but the downside is likely limited.
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With all eyes on the FOMC where no rate change is expected, traders and investors consider what the Fed’s stance will mean for markets