Another up day for US equities on Wednesday, the S&P up around 1½% heading into the close and on track for another record high. Bonds were notably sideways in contrast and US10yr yields again unchanged at 1.09%. Also, earnings reports underpinned equity sentiment; Netflix rose 16% after noting its subscriber numbers increased by a record 37mn in 2020. It seems lockdowns and TV go hand in hand.
The US stock markets kicked off the Biden era fashionably in vouge, hitting record highs as the roller coaster beneath the surface continues, where today's flavour saw mega cap tech and growth (software) stock flying off the shelves.
In a testament to the maximum policy overdrive, investors wasted little time getting their feet wet after Janet Yellen espoused by the Biden "go big" policy approach to repair the economic damage caused by the pandemic, which also highlights the importance of helping small businesses and the unemployed. Indeed, this provided both Main Street and Wall Street with the ultimate policy comforting blankets, proactively layered on thick and fast as the Democrats will get the policy show on the road "tout suite."
With "retail" wagging the dog and risk control buying combined with continued strong seasonal inflows keeping a bid to the market and forcing shorts to cover, it looks like clear sailing on top, but underneath the surface moves are extreme.
Stock markets continue to reflate post-inauguration with the consensus view now that US President Biden's early focus will be more on growth than tax hikes. The market is also seeing through longer lockdowns on the premise that Covid-19 vaccinations will lead us out of the pandemic quickly.
Oil prices look a tad vulnerable to potential profit-taking after the US crude stockpile bearishly rose 2.56 million against consensus draw. Simultaneously, the near-term China crude demand forecast looks high and susceptible to revision lower as lockdowns spread in the country ahead of the Lunar New Year.
While oil traders see through longer lockdowns on the premise that Covid vaccinations will quickly lead us out of the pandemic, virus-enforced mobility clampdowns still hurt the very near-term view. And since calls for a commodity supercycle have been numerous after the November vaccine turnaround, open interest in Brent and WTI has increased hugely, suggesting that the market remains very susceptible to any potential bearish headlines, big or small, from a positioning perspective alone.
Predictably, prices stalled a little with the US dollar catching a bid ahead of this week's delayed inventory reports. And negative news on China didn't sit well as authorities move to slow Lunar New Years travel via Covid-19 mobility restrictions; the Central Government has announced that everyone nationwide who wants to travel domestically for Chinese New Year needs to show proof of a negative Covid test in the last seven days, and testing agencies need to provide results within 12 hours. Local governments have been told to supervise those travellers.
However, investors remain absorbed in positive near-term trends, highlighted by the Biden administration's all-encompassing focus on public health and economic responses to the Covid-19 pandemic as the expected time to normalize activity could improve significantly under the new regime. Indeed, there’s no shortage of top-flight healthcare experts willing to work with Biden's team, and if the healthcare and logistical communities can combine all forces and achieve the administration's lofty vaccination targets, oil prices could fly.
OPEC production at the moment remains well below the level required to meet anticipated demand; it should continue to drive a reduction in oil inventories as the global economy gradually recovers. Early indications for January OPEC export levels suggest a decline relative to December levels, which may also help support the oil price.
This week, IEA OMR lowered its forecast 2021 bearishly for demand and the EIA DPR raised US shale production estimates. The OMR did highlight the counter decline in inventories in 4Q with 'hefty draw-downs' into the year-end, and the market appeared to cut off that.
It’s curveball city as the market continues to debate what the US yield curve means for the dollar, while attempting to draw inferences from the Biden administration’s maximum overdrive policy in light of new administration favouring a market-determined dollar rather than advocating for strength or weakness. In one respect, Treasury Secretary Yellen could not have been clearer, noting that "the Biden administration won't pursue a weak dollar."
G-10 FX trading has currently turned into an endless exercise of chasing a mechanical bunny rabbit around a greyhound track.
History suggests that in short or even protracted periods of big-dollar directional confusion, value FX trades tend to dominate the picture.
EURGBP is sharply lower, breaching support at 0.8860 – though not on any apparent fundamental development other than Covid-19 vaccinations. The UK is at the centre of the "vaccinations will lead us out of the pandemic” theme, where vaccination programmes are ramping up significantly.
The Ringgit could consolidate around current levels today as G-10 traders debate the US dollar's near-term direction.
The big dollar (USD) feels a bit directionless and, compounding that listlessness, the oil market rally feels a bit exhausted in the face of possible near-term China demand forecasts getting revised lower due to the expanding lockdowns and policymakers looking to temper LNY travel by requiring vaccination mobility passport.
Not unexpectedly, gold bears were not keen to stand in front Janet Yellen’s "go big" approach to fiscal policy. Although the dollar hasn't offered up much of a helping hand, US10yr yields are again unchanged and this has allowed gold to float significantly higher on those "go big" policy balloons. And with both the Fed and US Treasury singing from the same dovish policy home page, it provides an incredibly supportive bullion background.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again