Asia Market: Turnaround Tuesday morphs into a buying bonanza

Market Analysis / 5 Min Read
03 Feb 2021

Market highlights 

  • All the ingredients for a rapid recovery from Q2 are getting sweetly baked into the reopening party cake
  • Strange combination of higher stocks and higher dollar has led to a lot of head-scratching in FX markets
  • Oil continues to strengthen as Shell makes a decade-high purchase

Markets

It’s risk-parity unwind to risk parity rewind, inspired by ameliorating US vaccine distributions amid more evidence that US President Joe Biden will push for a larger fiscal stimulus rather than seek bipartisan compromise.

Indeed, "The Street" has swivelled its focus from "GameStop" to "Game-on" as the investors shifted gears from a "Turnaround Tuesday" to a full-on buying bonanza as the reopening path looks gleaming with new Covid-19 cases in the US slowing, vaccine rollouts accelerating and investors now repricing in the upside risks to the markets US fiscal stimulus assumptions; all the ingredients for a rapid recovery from Q2 onwards are getting sweetly baked into the reopening party cake. 

Amazon and Google report fourth-quarter earnings in after-hours markets, and while the profits are good, news that Amazon CEO Bezos is stepping aside has raising a few eyebrows and caused a bit of knee jerk in the e-minis.

The US vaccine rollout has picked up linear momentum in recent weeks and the outlook has buffed up for several reasons. Unlike in Europe, manufacturers have delivered more or less on schedule. Both Pfizer and Moderna have reiterated they are on track to meet their contractual obligations in the coming months. Simultaneously, J&J has presented good trial results and appears to be catching up on pre-manufacturing delays. Further downstream, the supply chain's final mile has become more efficient, with a rising share of available doses getting administered.

Wallstreetbets is hitting the point of diminishing value and market interest as silver and GME roll over aggressively. With "greater fool theory" trades, you eventually run out of new money to keep things going and it usually all ends up in tears for some believers. 

As the "bricks and mortar" video game retailer trading frenzy fades to the background, a few weeks from now it will probably be something else. Retail traders will still be a force to be reckon with, but we’re perhaps past the peak YOLO world with the cat out of the bag.

Oil Markets

Oil continues to strengthen today with Brent just shy of USD58 a barrel before profit-taking set in – considerable activity in the physical market is behind the move and is pushing the backwardation further. Shell purchased five cargoes of North Sea oil yesterday in the Platts (10-minute) window and placed bids for seven more which remained unfilled. To put that in perspective, typically one or two cargoes trade in the 10-minute window. And according to Bloomberg, yesterday's gigantic purchases were the most by a single company in at least a decade.

Demand in the physical market has been the driver of a strong front of the curve for this week, fueled by news of OPEC+ production compliance at 99%. US vaccine rollouts picking up steam in recent weeks are all getting framed as the Biden administration pushes for a colossal stimulus deal. 

Optimism is also getting nudged forward as the northern hemisphere puts January behind it. More frigid temperatures and huge snowstorm blanketing the US East Coast should not be underestimated from a heating oil perspective.

But snowstorms could be a double-edged sword not only from a travel impairment perspective; it dramatically slows down the vaccine distribution to some of the most populated cities in the US where jabs are most needed. 

Currency Markets

The strange combination of higher stocks and the higher dollar has led to a lot of head-scratching.

It’s an odd scene these days to see the USD higher in such a risk-parity amorous environment. But it’s quite possible the higher-level of US vaccinations is behind the dollar appreciation. The yawning distribution gap between the US and EU tips the immediate growth differentials in the US dollar favour in a humungous way. 

And as money flows out of Asia on concerns about China tightening, perhaps it flows to the places that had successfully vaccinated the most citizens (USD and GBP).

The Euro 

EURUSD was still for sale into the New York close, a continuation of last week's narrative. But some newly minted shorts ran for cover after former ECB Chief Mario Draghi is reportedly the frontrunner to serve as the next Italian PM, which is exceptionally positive from a diminishing political risk premium perspective, but is it enough to change the selling onslaught? I caution making much of a meal out of market moves into the Grey Zone where liquidity is thin between the New York close and when Singapore eFX engines fire up, but Draghi is the market wizard and a political force to be reckoned with. 

Still, after having broken a series of lows near 1.2050, the pair has failed to reclaim that level as the market now sets sights on the possible real position trap door of 1.2000 from which the pair broke higher in a big way in December.

The Australian Dollar

The AUD is somewhat weaker after the RBA surprised markets with an announcement that its QE programme would be extended. The FX reaction was not huge, most likely because an extension to QE always looked likely and this announcement just arrived a bit early. Still, there was no doubting the dovish intent of the accompanying statement.

The determination of the RBA and other central banks to push back on tapering expectations suggests rate differentials are unlikely to have much impact on FX for now but with US stimulus packing likely to be bigger than expected, in an orthodox world massive stimulus creates inflation and typically causes the Fed to react. But it's not the Fed that tells the market what to do – instead, the market reveals to the Fed what they should do. More efficient vaccine rollout and a tremendous stimulus impulse should bring taper talkback into focus.

The Malaysian Ringgit

The ringgit struggles for momentum on the back of a surging US dollar, despite higher oil prices and improving global risk sentiment. It’s possible that investors are pivoting out of Asia due to China rate hike fears and diving in the US stocks where the vaccine rollout appears to be accelerating to full bore. So, traders will be keeping close tabs on capital markets outflow data this week. 

Gold Markets

The retail buying bonanza is fading with the US dollar surging on the back of linear momentum on US vaccination rollout outs and massive demand for US stocks. As a result, gold has fallen out of favour.

For more market insights, follow me on Twitter: @Steveinnes123 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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