The markets appear to have entered a period of consolidation but as for the reason why it seems easier to paint a speculative cause and effect to fit the narrative, be it the collective US political insanity during Trump's final days in power to soaring US bond yields and the uncertainty of whether the Fed is going to push back. As ever, the truth tends to lie somewhere in the middle.
And it's hardly surprising why investors are a little confused when the narrative morphs in 24 hours from stimulus "float all boats" to the ebb and flow of those very same tidal waves having overcooked the markets triggering the Roche limiter. All of this sees risk sentiment entering the early-stage process of fragmentation.
However, any time you get a quick fixed-income move in either direction, especially one that challenges a one-sided bullish view, the market narrative naturally takes a pause.
And while the structural catalysts of vaccine distribution and activity normalization remain intact, we’re now potentially approaching the last stage of fiscal stimulus and the Fed is on a path to tapering the pace of asset purchases.
Whether one wants to discuss the epidemic or the Beltway situation, there's light at the end of the tunnel. The problem is that, for now, the green light has temporary given way to a state of investors’ political angst. Still, fortunately, the promise of brighter days ahead – on the back of the three-pronged puts of vaccination, fiscal and monetary policy backstops – make it difficult for equities to sell off in a determined fashion.
But investors have found themselves sitting under one of the darkest ever clouds of political apprehension that’s now hanging over Donald Trump's final days, with “The Street" growing more stressed by the hour about the prospect of more violence. On Monday the FBI warned that armed protests are planned at all 50 state capitals, and in Washington ahead of Joe Biden's inauguration.
People worldwide are tired and frustrated by lockdowns, and the real fear here is that anarchy on the streets of the US could spread across the planet as quickly as this new coronavirus variant.
Let's hope I'm wrong, but near-term equity direction is likely to be choppy while held hostage to this very same political angst. Hopefully by next week cooler heads will have prevailed and, after a period of digestion, the bull case for the market still looks compelling through any lens. But instead of running the clock out on Trump, the Democrats and some Republicans are invoking a policy that might not only politically backfire, it could trigger more anarchy in the streets.
The risk for markets around President Trump's impeachment is not necessarily about the outcome, as it’s currently unlikely the Senate will reach the two thirds majority required to convict, but the timeline and how it pushes back the discussion around additional fiscal stimulus. And for above water market concerns, that seems to be where the balance of risks lies.
Of course, the rising Covid-19 case counts and never-ending lockdown loop parts of the world have found itself back in again remains a constant blight, but that could also be part of the problem as political unrest grows worldwide as “Average Joes” are fed up with the so-called East Coast-West Coast "elitist agenda" and the power of social media to rewrite the laws of free speech at will.
You have 100 million folks in the US that aren't happy. That rebellious army is growing worldwide as people try to rationalize their leaders' response to what some are unwisely calling The Duck Dynasty invasion of Capitol hill. Still, a huge disconnect is growing around why their political leaders didn't stand up to China over the Hong Kong affair.
Covid resurgence, a stronger dollar, Fed policy uncertainty and political angst are all combining into a near-term toxic elixir for oil markets as traders are so far unwilling to fire higher this week. This is despite the structural catalysts of vaccine distribution and activity normalization remaining well intact.
Still, the modest pullback in price is very unsurprising after such a strong first week on the year, reacting to the surprise unilateral cut in Saudi production and the prospect of increased economic stimulus in the US as the Democrats won control of the Senate.
Friday's Baker Hughes rig count saw a rise again. Still, it was nothing too excessive; US mobility activity, especially now with the possibility of an extended period of anarchy in the streets, remains a major risk to medium term oil market recovery stability. Folks were already scared to leave home due to the Covid scare, but after the FBI warned that armed protests are planned at all 50 state capitals and in Washington ahead of Joe Biden's inauguration there’s even less reason to go out.
An outbreak of Covid cases in Hubei province in China, with the country recording its highest total of new cases for five months, will be keenly observed in Asia in particular as China has been the driver of physical demand recovery in oil markets.
The other problem flying under the radar is a worrisome theme that could negatively impact sentiment and it’s a case of a few bad apples ruining the whole bunch: because the current lockdowns weren’t being observed, further lengthier restrictions might be needed.
I think the street views this toxic elixir as a near term speed bump and not necessarily great reasons to go short contract at this stage.
The USD is stronger this morning with the "risk-off" mood likely the driver, while the clouds of Fed policy taper uncertainty continue to hang over currency markets.
It's difficult to figure out what's important for FX markets right now – especially after spending six months under the blob of reflation and USD debasement story exclusively. Suddenly, there seems to be so many more moving parts.
For months EUR was able to capitalize on USD disdain despite its fragility. The EUR is now proving vulnerable to the USD's stronger start to 2021.
With pound failing to lift off on Brexit due to the new virus variant, I believe the UK's negative interest rates would be a big enough domestic story to impact GBP. So, mark February 4 on your calendar as the market goes through the procession of reducing long GBP exposure as we get closer to the BoE rates decision.
The Ringgit is suffering from a triple whammy of negativity: oil prices remain tentative, the US dollar gets stronger across the board on rising US yields, and the Malaysian government’s tightening of MCO restrictions is yet another set back to the struggling domestic economic recovery. For the Ringgit, all this adds up to the sound of retreat.
For more market insights, follow me on Twitter: @Steveinnes123
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Stocks soar, powered by first-rate earnings and a dazzling run of economic data; Gold plays catch as G10 falls flat while oil basks in the afterglow