Global equities traded on an even keel Wednesday as robust earnings from the market darling and widely held Alphabet Inc holds the ballast in check. At the same time, positive results in Europe also provides a lodestar of optimism. And framing the positive scrim, oil prices advanced almost 2% after OPEC+ signalled they would maintain their output policy to rebalance the market; higher oil prices always provide an encouraging perspective.
In an attempt to draw on bipartisan support – but mainly to appease fiscal centrist democrats – US President Biden has floated the prospect of keeping the size of stimulus checks unchanged at $1,400 but reducing the number of recipients: "we can better target that number".
The market thinks that any negotiations will be primarily held within the Democratic party (i.e. with Joe Manchin and Kyrsten Sinema) but still expected the price tag to come between 1.3-1.9 trillion. And while this is an evolving story, it certainly underscores the influence that individual Senators wield in the 50:50 Senate split.
The VIX recovered much quicker than usual
The VIX is the market’s primary watchtower and it’s likely caught more than a few by surprise by how quickly the attack of the so-called "meme stock" shorts has subsided and how fast last week’s massive VaR and VIX triggered sell-off has recovered.
It's not a coincidence but no less striking how quickly the VIX has declined since last week's dislocations; since 1993 there have been 29 days on which the VIX has moved 15 points higher over five days. Usually, the VIX is still higher five days after the increase. However, this time, the VIX is already down to the 25 hands and 3 points away from the pre-meltdown level. Events with innocuous beginnings have often morphed into something much more sinister, but not this time. Presumably it's yet another example of the volatility smothering effect of central bank policy.
Indeed, this was never a macro risk-off event and the dip was always going to get hoovered, just not as quickly as what happened. But thanks to the rapid recovery on the VIX and the enduring policy puts, it was all hands on deck for the relaunch of the risk-on steamboats.
And better economic data overnight helped frame out the return of the bulls. In the US, ADP employment more than doubled consensus in Jan – 174k, with upward revisions – and likely to boost expectations for payrolls Friday which continued to keep US equities on an even keel throughout the New York session.
The API stock figures released on Tuesday were particularly bullish with inventory draws across the board. However, the official numbers from the DOE painted a different picture: a small draw in oil stocks and another large build in gasoline which triggered some profit-taking off the market intraday high.
However, traders quickly chalked up the difference to a massive influx of Canadian oil. Bids promptly returned as inventories should rapidly deplete due to the heating needs as a blustery cold snap and winter storm conditions continue to blanket the US east coast. Indeed, the April Brent contract has gotten off to a flying start, coinciding with a cold snap in the US. And let's not forget about China: the world's second-largest consumer is also experiencing a bout of frigid weather.
The main takeaway from the JMMC, and bullish for oil prices, is that OPEC said it expects OECD oil inventories to fall below the 5-year average by the middle of 2021. Of course, this is assuming that Chinese buying does not backpedal as prices strengthen.
Declining stocks indicate recovering demand and will make it easier for OPEC+ to gradually normalise production and reduce the spare capacity cushion that limits oil upside over the medium term.
While global economic data has been improving, there are still plenty of residual lockdown concerns as evidenced by yesterday's China service PMI slump. Still, OPEC's disciplined supply management regimen continues to help investors look through any near-term uncertainty.
Nonetheless, the closer we shift towards Brent $60 bbl one would have to assume it could be a potential faster game-changer and OPEC + production cut unwinder. That’s not to mention US shale will be eager to step on the production accelerators.
The USD's apparent indifference to some big moves in risk appetite – with lots of positive momentum under the hood in the multi-asset scrim continuing this morning – is still a bit of a head-scratcher. Equity markets continued to revel gently, extending yesterday's rally on the back of better than expected corporate earnings, helpful headlines regarding Covid-19 vaccines, lower Italian political risk and further progress towards additional US fiscal stimulus. The DXY USD index and the Bloomberg USD index (which includes more EM FX) are unchanged today, but that might not last.
The longer we hold above 1.2000 EURUSD, the more likely we could see a squeeze back above 1.2050. But this will probably be viewed as another selling (EURUSD) opportunity as the USD's resilience to the recent rally in equities has rejuvenated the "US exceptionalism" theme. The consensus forecast for 2021 GDP growth has moved to 4.1% from 3.8% back in December, thanks in part to better rollout of vaccines.
It’s worth noting the overnight move lower in EURUSD is much smaller than the previous three; there’s significant demand down here as we test a crucial level – the old 2020 resistance at 1.2000/15 is now support in EURUSD. I’m surprised we’re not higher on the Draghi news as his brand name is as good as it gets and BTPs have predictably ripped higher on the headline.
Risk on betas
There have been some gains in "risk-on" G10 FX such as a higher AUD and NZD, although the latter's bounce was mostly in reaction to better than expected New Zealand employment data. USDCAD is little changed despite the cheerful risk mood and sizzling oil price rally. But perhaps the biggest surprise is the EUR and GBP's inability to capitalise on the gains in equities, with their "risk-on" allure tarnishing.
The RBA’s decision to extend QE beyond April came as a surprise. The market thought a decision would come in March or April, preserving optionality. Still, the Aussie fundamental views remain intact – strong growth domestically plus robust commodity prices should see the way higher. If anything, the RBA policy was leaning against AUD upside, rather than trying to weaken ostensibly and its strong beat to US stocks should come shining through.
The weaker read on the China PMI and the PBoC drawing a temporary line in the sand around 6.46 (USDCNH) into Lunar New Year (LNY), not to mention a nascent ASEAN Central Bank pushback against the rising US dollar which is holding down inflation in the domestic economic threatening export has taken a bit of wind out of the MYR's sail.
Despite higher oil prices, we’ve seen earlier pre-LNY de-risking than we usually do which could be a reaction function that’s possibly triggered by the PBoC’s currency policy to suppress volatility into LNY.
Gold has relinquished it's January seasonality boost. With Chinese physical demand getting balloted down due to the LNY mobility restrictions, the market remains a seller on rally environment. Gold traded flat overnight as FX market did little to show the way.
The long positioning in silver seems to have been reduced pretty quickly after the spike on Monday, with the metal having now gone from $25 to $30 and back to $27. Gold seems to have been dragged back to the bottom of its range for the past few weeks.
Gold and silver bugs remain resolute. The whole story should reflect how many USDs have been printed by the Fed and paid out by the Treasury to Americans over the last year. As long as gold stays above $1,800, that argument should continue to hold.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again