It’s a very constructive backdrop for US equities after US Treasury Secretary nominee Janet Yellen performed admirably in her Senate hearing, stressing the need to "act big" on fiscal policy, at the same time acknowledging that over time the budget will have to be put "on a path that's sustainable”.
Senate Republicans are, of course, resisting Joe Biden's USD1.9 trn package. Still, Yellen is perhaps the best and most skilled salesperson to drive the Democrats' plan in today's highly bipartisan climate, due to her impeccable resume, focus on low wage unemployment and exemplary record steering the most influential central bank in the world: the Federal Reserve Board.
And when you have both Fiscal Stimulus (Yellen) and Monetary Policy (Powell) singing from the same hymn page in suggesting greater co-operation between the Fed and the Treasury, it's truly a match made in market heaven.
And as far as having the most proficient at the helm of the Treasury tasked with rescuing the US economy from the depths of the Covid induced recession through government intervention, The Queen Has Arrived and the markets reacted in kind. The US dollar is down; equities are up, the US Treasuries curve is bear steepening and markets are again looking to get their reflationary mojo on with interbank liquidity returning from holiday mode.
Ahead of Inauguration Day, investors continue to offer up a Biden policy seal of approval on the agenda sequencing, with vaccinations plus stimulus now and taxes later to drive risk through H1.
Goldman Sachs blew away earnings on the back of strong trading and investment banking revenue while Bank of America unveiled decent results, mainly on the end of the release of loan loss reserves.
For those grounded investors that believe in the real economic indicators, there’s nothing like hearing from the CEO, where comments from BoA Brian Moynihan caught the market's attention: "In the fourth quarter, we continued to see signs of a recovery, led by increased consumer spending, stabilizing loan demand by our commercial customers, and strong markets and investing activity."
That suggests some positivity on the near-term economic outlook and sounds so much better hearing from boots on the ground rather than house analysts on the 32nd floor.
The energy markets are racing higher out of the gates in Asia, aided by a lower dollar and hopes of a sizeable economic stimulus package from the incoming Biden administration.
Energy traders are packing in a chunky stimulus response that might matter to investors from both a commodity and currency perspective, where the US dollar could weaken to oil prices’ benefit since crude is priced in US dollars.
The most favourable elixir –US stimulus and the imminent Saudi production cut bolstering efforts of OPEC+ to keep supply well below demand this year – continue to help price action. Still, we’re in a very susceptible period for oil as the market is targeting its vaccination rollout sights for a Spring Break reopening, hoping governments could feel comfortable lifting restrictions on economic life once the most vulnerable 20-25% of the population are vaccinated.
Overall, the policy mixes between OPEC+ current supply discipline, coalescing with the Biden administration's overarching focus on public health and economic responses to the Covid-19 pandemic, suggesting oil prices can go much higher if the healthcare and logistical community can combine all forces and achieve the administration's lofty vaccination rollout targets.
It’s a big ask, but with the "best of the best" in the healthcare community eager to work with this new administration, after a slow start to the US vaccination rollout there’s optimism that the listing delivery tankers will soon move on a more even keel.
However, Chinese New Year is less than a month away and with Covid-19 infection numbers already on the rise again in parts of Asia, there are concerns about what the holiday season may mean for efforts to contain the virus's spread.
The calls for a commodity supercycle have been many after the November vaccine turnaround, and open interest in Brent and WTI has increased significantly. And the strong rally for oil into year-end 2020 and in the first week of 2021 has left the price-sensitive to profit-taking. I expect oil to stabilize near the current level as things progress on the coronavirus vaccine rollout. We should gradually move closer to a typical demand environment; oil prices will then soar.
On the political policy front, it’s a humungous day in the oil market as we could see a full-scale changing of the energy market guards as Joe Biden is sworn in as President. The markets will increasingly scrutinize early signs from the new administration as they relate to oil, including around regulation as the early indications that the administration will block Keystone XL and is likely a signal of more challenging conditions to come. The environmental (re-joining the Paris Climate Agreement) and foreign policy agenda, especially towards China trade, provide a most uncertain mix to the expected stimulus boost and new initiatives around Covid-19.
It‘s been a tricky start to the year for G10 FX as the favoured trades have not performed and, honestly, nothing has moved.
But with Janet Yellen putting a convincing and staunch dovish footprint on markets by supporting maximum policy overdrive, it should encourage more USD shorts on the view that monetary and fiscal policy are singing from the same hymn sheet and it’s one of a maximum possible stimulus.
It's striking just how appealing virtually every asset class on the street looks when viewed through the weaker US dollar lens.
The Biden stimulus rally has pushed emerging market stocks to all-time highs, so with risk sentiment improving, Brent Crude trading comfortably above $55, and the US dollar weakening a touch, it should provide a more inviting backdrop for the ringgit.
However, while the incoming Biden administration's focus will be domestic-orientated, another all-time high for China's trade surplus in December ($78.17 bn) ostensibly supports US foreign policy hawkishness, which is not great for Asia FX risk and it’s worth keeping ears and eyes trained on the early tonality of the new administration's views on China trade.
Maximum stimulus overdrive, favourable to bullion turnaround in taper talk and slightly weaker dollar paint an encouraging backdrop for gold prices – provided real rates oblige. XAUUSD is hovering close to the 200dma, with the potential for a rally on a break above that as gold has been forming a base around the $1,820-1,840 area.
Gold has been facing headwinds from a strong US dollar and higher real rates so far this year. The market is trying to hold the yellow metal above crucial support levels, which is encouraging. Still, so far gold has struggled to recover convincingly past the $1,850 psychological level, and the 50dma around $1,960 remains the ultimate target Q1 for gold bulls.
What Steve is looking at today
There are two takeaways from this week's China data.
First, a consistent and robust recovery in consumer-based spending is by no means assured once the fiscal stimulus is passed in the coming weeks and cheques are posted, or even when vaccines are rolled out more extensively.
Second, while the incoming Biden administration's focus will be domestic-orientated, another all-time high for China's trade surplus in December ($78.17 bn) ostensibly supports US foreign policy hawkishness.
Axi in the media
Join Steve later today as he provides market analysis on his weekly chat on Singapore Today, with CNA's Lance Alexander and Melanie Oliveiro at 6:30 PM (SGT).
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