Yesterday we concluded that the fall in the VIX provided a beacon for clear sailing when it should have read that the fall in the VIX triggered the reflation trade to "all systems go", which was then boosted on stimulus rocket fuel mode.
The tides of US stimulus rising all boats is providing the significant risk-on accelerant. Optimism over the colossal US stimulus deal fuses at a critical point when US Covid-19 crisis management regimen turns the corner on a positive note, providing market boosters with excess rocket fuel to burn.
There are four powerful "macros" supporting markets this week: US vaccine progress, RBA easing, Fed communication, and US government spending. Together, they remind investors that economic conditions will improve.
With central banks continuing to cover investors who are now pivoting to improving macro developments – supported by oodles of monetary policy – risk can remain at lofty levels if the macro backdrop remains supported. And we won't need to wait too long to prove that thesis as tonight’s NFP should provide the suitable sounding board.
Colossal progress continues to be made on the US vaccination front where more people are being vaccinated (or at least getting one shot) than have tested positive for Covid-19 since the pandemic began. Since vaccination progress hasn't come close to reaching its apex yet, there remains a long runway for vaccine catalyst price evolution through the end of 2021. As consensus as that trade may already be, it’s difficult for prices to have fully reflected it all this far in advance.
In the main, US equity markets continue their grind higher as vols normalize and focus shifts back to earnings and macro drivers such as reopening and stimulus. Similar to yesterday, the reopen trade outperforms with banks and airlines leading. Mega-cap tech is more mixed today with small and mid-sized growth exceeding as folks move out the risk curve on the tech side.
But a truly good outcome on the stimulus front is that it benefits all, especially in heavily hit segments of the country where one in six can't make rent and one in four small businesses are closing permanently or have already shuttered.
It's Friday and I'm just not sure how much gas I left in the can after this week’s action so let’s just head into the weekend safe in the knowledge that 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. In short, the ingredients are there for a rapid recovery from Q2 onwards and all roads lead to El Dorado.
Just as people were starting to get used to the idea that the People's Bank of China (PBoC) – with the economy weakened by the pandemic and heading into the Chinese New Year – would keep liquidity flush, it withdrew it. And this was just as end-of-month demand for it picked up.
The change of tune came against a backdrop of concern that asset bubbles – inflated by plentiful liquidity – were forming. Market rates soared, leaving many investors guessing the PBoC's policy intention amid mixed signals.
There was a nice V-looking chart for WTI today with the commodity hit on the release of the EIA's Annual Energy Outlook 2021 (projecting it will take years to get back to 2019 levels of US energy consumption), only to quickly bounce back.
However, oil spent much of today above WTI USD56 a barrel, extending gains from Wednesday when OPEC+ maintained oil output cuts. Optimism over a much-discussed US stimulus package also proved supportive.
Rounding out the positive scrim and pushing back on any thought that China demand could dampen as prices shift higher, an industry tracker reported that two Very Large Crude Carriers (VLCC) are heading to China for March 22-March 24 delivery of North Sea oil, which confirms that real demand is driving the front end of the curve.
When demand drives commodity prices, it has a more bullish impact and leaves a more lasting reflection on price action.
The full OPEC+ ministerial meeting in early March could be more difficult because production increases will likely be on the table, especially if oil prices continue to trend up. Until then, the aggregate group shows commitment to do whatever is necessary to support; the outlook is rosy.
The USD continues to rally while the equity market rally pauses for breath. This week's breakdown in the relationship between the USD and equity markets is already triggering talks of a new paradigm for the FX market. The USD's resilience to the recent rally in equities has rejuvenated the "US exceptionalism" theme, with the consensus forecast for 2021 GDP growth moving to 4.1% from 3.8% back in December, thanks in part to vaccine optimism. Data suggesting upside risks for tonight's US payrolls report will be a test of the US exceptionalism thesis.
The best explanation for the rotation out of Asian and European currencies and into the US dollar this year is a global pass-the-growth-baton cycle. Asia got hit first, took swift and draconian measures, rebounded early, and those currencies rallied the most.
The USA, which got hit hard, has room to rebound due to high vaccination rates, but with herd immunity on the horizon the US is now wrestling the global growth baton from China and looking to become the global growth leaders. And with China clamping down on "bubbles", USA could grow faster than China in 2021. While not a base case, if the US starts wearing the yellow jersey in the synchronized global growth race, you don't want to be short dollars when the US exceptionalism trade kicks in.
US Treasury yields have been pushing higher on the US stimulus talk and may prompt the Fed into removing some easing sooner than the market expects, as an outcome US Treasury yields remain too low and the curve too flat. A UST 10-year bond yield of 1.50% should quite easily be possible. And while the gradual rate rise shouldn't be a big problem for equities as policy mix and vaccine rollouts remain exceptionally supportive, the one asset that's least clear is the US dollar.
After a unanimous vote, the Bank of England policy was unchanged, as expected, so the bank rate holds at 0.10%.
While it’s not precisely one-way traffic, it certainly seems to be a more bullish story than the market has been expecting with all the speculation in recent weeks about negative rates. As such, the pound is reactively bullish.
Depending on which market you’re trading, the Bank of England either helps or is a hindrance. Rates weren’t looking for negative policy today, but the tail trade was for at least a softer message from the BoE. As it turns out, the surprise here is how upbeat the BoE sounds.
Asia currencies are struggling, mired in the early stages of a growth paradigm shift that could see investment flow exit Asia and enter the US, supporting the US dollar. Not only is the US economy turning the pandemic corner, but China appears to be on policy throttle down mode as a change of heart on monetary policy is starting to form against a backdrop of concern that asset bubbles are forming.
Ultimately higher interest rates will dampen credit impulses and slow growth, much to the detriment of local trading partners like the ringgit. There are also building concerns about hawkish trade comments for White House administration which continues to rattle stock markets and a possible PBoC hawkish pivot.
Still, I suspect the MYR could be relatively insulated to higher US yields and China policy walk back as oil prices look set to outperform most markets estimates in Q1.
Gold and silver saw liquidation on the back of higher US yields and stronger US dollar-dominated flows over the past 24 hours. Yields could rise further and quicker on an NFP beat, where that thought is leaving gold investors both uneasy and queasy.
I see a substantial retail position risk in silver due to the unusual inflows last Friday and early this week. If gold moves below $1,775 with silver in tow, it could trigger a larger precious metal meltdown where then gold momentum might feed off a silver sell-off.
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Sometimes you have to throw conventional wisdom out the door and just let the good times roll