Stock gains faded after Dow Jones reported that Pfizer expects to ship half the Covid-19 vaccines it originally planned for 2020 due to supply-chain problems. S&P 500 pared some of the intraday advances ahead of the cash close, bringing it back to being near unchanged on the day.
But the overall sentiment remains supported after US Senate Republican Leader Mitch McConnell cited "a few hopeful signs" on stimulus negotiations in recent days and suggested that compromise was "within reach" – in particular, "strong bipartisan support" for certain stimulus elements, including a "targeted" round of the Paycheck Protection Program. Oil prices lifted 0.8% after OPEC+ agreed to ease output cuts more gradually than previously expected, adding 500k barrels a day in January, a quarter of earlier expectations. The US dollar inched back some lost ground, but continues to trade on the back foot.
Investors continue to knock on wood that a pre-holiday Christmas stimulus bill will provide the ultimate holiday stocking stuffer this year and continue to look on the sunny side of the eventual vaccine rollout. But before we can make new gains, there’s the usual sentiment tug of war between medium-term optimism and near term Covid despair.
I don’t know how many times we’ve been down this road before. Still, all roads lead to prosperity eventually as the post-pandemic market rally has moved seamlessly from policy-driven to mobility-driven to vaccine-driven, and should continue so even if some investors are sitting on the fence waiting for a new stimulus deal. Democratic leaders appear to have yielded on their insistence on a multi-trillion-dollar fiscal stimulus package, raising the odds that an agreement can be reached before the end of the year.
On the Pfizer front, is anyone surprised that there are not enough sub-arctic temperature shipping containers instantly available to make good on their 2020 delivery channel commitment? Answer: NO!
The reopening trade was well bid from the open on Thursday, despite paring some gains into the close, with most moves getting to extend through the early goings. Airlines in particular rallied as many short covers as possible and a ton of options activity going through. So, this is proving very painful for many. Investors remain negative in the sector but are being forced to act. S&P 500 volumes are down 15% vs. the 20-day average. Energy volumes are down 22% vs. the 20-day average, though the sector has had another day of outperformance after OPEC acted just enough to buttress the oil price floor stopper.
There was a chunky increase in US IHS Markit November services PMI, up to 58.4 (vs. prelim 57.7). Firms faced greater demand and, as a result, increased workforce numbers. The expansion in employment was the sharpest since data collection began in October 2009. Some firms stated that employees previously let go due to the pandemic had been rehired. There was also evidence of firms passing on an increase in input costs to end clients through an accelerated rise in selling prices.
There are many questions and few answers on what is going on in fixed income here. Everything was popping, but it’s long-end led with 5/30 about 0.5bp flatter in the last 10 minutes or so. Once again, equities are not moving. Indeed, this is a fixed income event rather than a risk event. Dip buying after the recent selloff is my explanation, though I admit I’m just throwing spaghetti at the wall on this one.
OPEC and Oil
All eyes were on the OPEC+ meeting overnight where oil ministers ended up at the halfway house sharing a glass half full. In a typical OPEC+ fudgy, they came up with the ultimate compromise as the producer's group agreed to taper production increases. They’ll start with 500k barrels from January and hold monthly meetings to review prices and decide on output policies. These meetings will bring some volatility to the market and, importantly, stand to make hedging harder for US producers.
The front of the Brent curve rallied, while the back shifted lower. The front of the WTI curve didn’t rally as much while the end moved further down. The move lower in the curve started last week with what looked like producer selling as we alluded to last week (future hedging production around $45 a barrel, levels are last seen in March). Today's shift was also to account for the extra oil production coming in from OPEC+.
An interesting but not so cohesive tidbit was that Saudi Arabia and Russia usually chair the meeting, but only Russia did the honors this time. Some see this as a clear sign of the conflicts within the organization. And the time it took for OPEC+ to agree on the next phase of its cuts is symptomatic of the depth of differences emerging as the group starts to see a higher production path.
How this outlook interprets into prices will largely depend on the degree to which OPEC+ cohesion remains intact. As the market returns to normality via vaccine rollouts, one would expect recent tensions over compliance and quota levels to resurface. If OPEC+ can fortuitously superintend these tensions and accommodate higher supply in a disciplined manner, it could lead to a rapid erosion of the global inventory excess. However, if the agreement fractures prematurely, the downside to prices could be significant.
After recovering a sliver of lost ground on the Pfizer news, the street is holding firm thinking the dollar is most likely to sell off dramatically. The negative gamma above the old year-to-date highs in EURUSD near 1.2010, alongside a couple of technical breaks, has acted as fuel to the blazing dollar fire. The 'FOMO' chase will surely reengage as positioning is trying to play catch-up to the move's size. We could be heading for a similar outsized rally to that from back in July.
EURUSD has extended its rise, taking it from 1.16 on US election night to more than 1.2150+ at the NY open. The EUR continues to act as the mirror to the market's USD scorn amid hopes for global reflation. However, that reflation story felt off in the distance after today's Eurozone data.
But the global reflation theme is increasingly entrenched. And the moves under the hood, like the EURUSD, are justified to a significant extent, with planned rapid vaccine rollouts across the major economies and renewed bipartisan US fiscal negotiations driving reflationary cross-asset moves.
I think the ECB will react to the euro surge, at the latest on December 10 (monetary policy meeting). If so, this could easily trigger some EURUSD retracement. Of course, this is about dollar weakness rather than euro strength, making it trickier for the ECB. Nevertheless, back in September, the verbal intervention was quite effective, hence there’ll be a strong temptation to try it again. In any case, the stronger euro is a serious problem for the ECB for next week's new macro projections; the cut-off date was last week, hence the latest surge will not be part of the forecasts.
We could also see a bit of profit-taking ahead of tonight's NFP, especially in light of the chunkily good IHS Markit November services PMI.
GBP is rolling off the highs a little; a member of the EU team said there was still a way to go in Brexit talks, according to Reuters. There’s probably as much vaccine news as Brexit news in GBP at the moment with the rally over the day (up 100 pips) less to do with deal or no deal and more to do with the UK having a lot to gain from a vaccine rollout, it being a service-led economy hard hit by the virus.
The market seemed to take its lead after it looked like Taiwan agent banks shifted their defensive line lower after the break of 28.500.
And regardless of what's going on the US foreign policy front, traders pilled back into Asia FX risk with the offshore yuan eventually carrying the rally baton lower to 6.53 level as the global reflation theme continues to resonate through the Asia FX complex, single handily supported by China's actual reflationary impulse as viewed through this weeks PMI data lens.
On the ringgit, I would think sentiment could be mixed on the OPEC meeting outcome, which ended in the ultimate fudgy compromise offering up just enough to hold current prices in check. Still, given the global reflation rally weaving through the FX complex, supported by China's strong PMI reflationary data, I would expect the MYR to remain in a favorable light and poised to play more catch up with the yuan – even more so next week if oil prices hold base as desired.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again