The Week Ahead
With the data docket fairly light and the Fed now in its self-imposed blackout period ahead of the December 16 FOMC meeting, all eyes will be on budget developments in Washington DC. Recall that Congress is negotiating an omnibus spending bill for FY 2021; the current legislation is set to run out on December 11.
In stocks, why try to push against what's not broken as the stimulus and vaccine optimism should continue to push the overall tape higher, and there is no appetite for protection. It seems investors are willing to ride this into next year, ignoring the latest mobility restriction headlines.
Europe, the Euro and the ECB
The peak of the second Covid-19 wave has, according to data trends, now passed and infection rates are now declining in major European countries; hospital and ICU occupancy has peaked and positive test rates peaked a few weeks ago. These trends suggest the death rate in the second wave is likely to start declining shortly. France has relaxed some of its lockdown-lite restrictions and the street, particularly oil traders, will see how far activity and mobility levels recover. Other countries are also showing a slight increase in mobility over the past week. It will be interesting to see if this trend continues or activity remains near the low levels caused by the second lockdown.
Above and below the hood, momentum in EUR continued to accelerate last week. The front-end positions were relatively light into year-end until the break of 1.20, which triggered both corporate and speculative demand. This suggests the more that USD starts to break through key levels, the more it will force natural corporate buyers of the EUR to consider a larger than normal hedging regime that will be pushed along by hedge fund rotation in cyclical-heavy EU stock, keeping visible USD price action negative somewhere in the currency complex.
But, as we stressed last week, the reflationary direction of travel for the USD makes sense, while issuing a cautionary reminder that it's always prudent to let the monthly NFP chips fall where they may and, of course, wait for the two central banks, FED and ECB, to have their December say. That’s nothing prophetic, it's just the way I manage risk.
The dollar bear analysts will tell you the payroll number shouldn't matter for markets. And that, more importantly, it's Friday and the market is taking off some positions – especially in EURUSD which has come very far, very quickly.
Still, the odds of a fiscal stimulus package have increased from zero last week, so it wouldn't make too much sense for EURUSD to collapse here completely either, or I would expect dips down to the figure will likely be bought. EURUSD trades at 1.2120 at the close.
However, I think the decline in the US unemployment rate to 6.7% along with the 4.4% increase in hourly earnings will make it more difficult for the FOMC to take additional accommodative measures at the December 15/16 meeting, such as extending the maturity of its bond purchases. The overall recovery in the unemployment rate matters more than the miss on the headline number. To some extent, this is offset by the possibility that a lower unemployment number makes it slightly less likely that Congress will pass a fiscal stimulus package this year (even if the odds are modest to start with). This payroll number was a big surprise, and I'm sure both Fed and Congress will take notice.
Short Euro Into ECB Decision?
The European Central Bank might expand the PEPP by as much as EUR650 bn and extend it as far out as mid-2022, according to a report by MNI citing unnamed ECB sources. A larger headline number is possible given the ECB can say it will only be used if necessary. Pushing PEPP out beyond end-2021, however, seems very unlikely. The ECB may emphasize the exchange rate more prominently in the introductory statement, so given the froth in the EURUSD, going short euro into the decision makes the most sense.
Crunch time for the Pound
It’s Brexit crunch time as European negotiators were in the UK last week trying to get a deal done in time for Europe to ratify it before the end of the year. The noise around various Brexit headlines continues, creating choppiness but little ultimate change in GBP. With both sides briefing the media, the tone of the headlines is in constant flux.
Noise is good, however, as it means that the two sides are finally getting to the very heart of the issues, and in the event of a deal it's easier to claim victory after a proper fight.
Both sides were briefing that a deal was possible on the weekend; this has now been pushed to Monday/Tuesday. The UK is planning to launch a Finance Bill next week, which is a complication as it will likely clash with EU views. The EU Summit on December 10/11 could be decisive; if there's nothing then, this could get dragged out further. The European Parliament has scheduled special sessions on December 23 and December 28, which would be the last moment for a deal.
Oil continued to rally on Friday and remained in the green for the whole session. The market liked the outcome of the OPEC+ conference, in that they’re not hiking enough to add to global stocks, and with an additional 500kbd we’re still on track for a stock draw in the first quarter. Brent traded only ticks away from $50 a barrel before retreating some, and WTI traded most of the day above $46.
North Sea oil loadings will hit levels last seen in 2017, according to Bloomberg. Demand from Asia has been steady, with China's demand pedal to the metal with record import levels in October and expanding storage facilities. India's refineries have also returned to healthy run rates.
What could derail prices? Things look pretty Teflon right now, but non-compliance by OPEC+ members, issues with vaccine delivery and storage, adverse patient reaction to vaccines, and any potential resurgence of Covid-19 in China before the vaccine rolls out would be the ultimate rally stopper.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again