US stocks rebounded on Tuesday following a sharp sell-off on the first trading day of the new year, with investors training their ears and eyes on the Senate elections in Georgia that could determine the direction of fiscal stimulus and US tax policy. But it was the energy markets that provided the soothing balm after Saudi Arabia's ground-breaking intervention on the oil markets overnight.
The Georgia Senate election runoffs make for an even more tenuous start to the year with investors nudging ever closer to the Covid abyss, even if the US has passed peak vaccine euphoria as dreams of the efficient rollout are now replaced with the unfortunate logistical reality markets remain focused on the end of the tunnel, regardless of its length.
The logical thinking is if the Democrats were to win both seats, the knee-jerk reaction would be for the Treasury curve to steepen on higher stimulus expectations. The 10-year yield will be able to gain, but without major adverse consequence on risk assets. It should support equity rotation, but not necessarily endorse at the index trade level, given tech’s high weight and the fear of industry-wide regulation and tax hikes. The dollar should come under further downward pressure, however.
But uncertainty is still the general worry out here over what direction a “blue wave” directional index bias veers. Would the markets focus on the possible boost to government spending, or don tin hats against the potential increase in tax and regulation? Or would the status quo trigger a relief rally by avoiding those tax increases or will disappointment on constrained fiscal stimulus reign supreme?
The bottom line is the market hates uncertainty, highlighted by the Cboe's Vix index – which measures the expected volatility of the S&P 500 over the next 30 days – gapping above 28 in early trading before easing back to 25 as energy proved the volatility suppressant.
Oil prices surged overnight after Saudi Arabia pledged to do a massive chunk of the production cuts’ heavy lifting by shouldering a voluntary production output cut by an extra million barrels a day, in what’s being described as a "new year gift" to the market by the Russian deputy prime minister.
Oil prices surged more than 5% today on the positive outcome of the OPEC meeting. In a spearheading statement which is bound to win over many friends in high places at OPEC+ and stamp their leadership over the producer's group, Saudi Arabia unilaterally decided to cut production by one million barrels a day for both February and March in an agreement allowing Russia and Kazakhstan to lift output by 75,000 bpd in February from January levels and another 75,000 bpd in March.
The Kingdom's willingness to face the music and hit the supply brakes is a colossal signal that the behemoth oil producer will go that extra mile to defend oil prices while simultaneously recognizing the short-term demand risk as the new virus variant threatens s to clog up the path to oil demand normalcy. Indeed, this policy pivot fortifies the policy bridge that will span the economic demand-side gap until the vaccines are more widely distributed.
WTI topped USD50 a barrel and Brent traded shy of $54 a barrel before profit-taking set in after media reports that Asian refiners will not be getting into long-term contracts this year as demand concerns linger and margins remain soft. So, despite Saudi Arabia's ground-breaking efforts, we’re not out of the woods just yet.
The Brent curve's front shifted back into backwardation, and the Dec21/Dec22 spreads gained around USD0.70 in both grades.
The FX market has knotted itself up like a tightly coiled spring just waiting to pop out of the box regarding the Georgia runoff. Indeed, it feels like the street is just waiting for the event to pass before shifting back into dollar shorts vigorously – and it’s not too late to get back on board.
At this nascent stage of the economic recovery, it’s hard to think that current FX levels have priced in the lengthy vaccine recovery – if anything the Georgia senate runoff is a speed bump, not a roadblock.
Petrol currencies are flourishing; USDCAD hit new lows at 1.2657 as the crude surged overnight. The pivot area at 1.2725/30 should provide resistance now and the 1.2550 area support (April 2018 low).
The GBP steadied in London after the UK stimulus relief rally on the FTSE. Still, the broader market is suffering from a case of Covid indigestion as new worldwide lockdown continues to foster a wider "risk-off" mood.
Better than expected German data may have helped stabilize the EUR this morning. The 37K drop in the numbers unemployed during December was much better than the consensus, which looked for a rise of 10K. The gains came despite the imposition of additional Covid-19 containment measures in mid-December.
After struggling under the weight of energy releases profit-taking yesterday, the Malaysian Ringgit should receive a fillip from higher oil prices today, and the momentum arc should shift back bullishly towards the USDMYR 4.0 psychological level.
In FX and gold betas, what stands out is the flip in the gold-oil relationship from positive to negative. Oil has been left behind in the risk rally that gold has benefited from, but due to Saudi interventions and with the global vaccine rollout supports recovery in the travel industry, a more 'normal' gold-oil correlation should return.
Gold is in a holding pattern ahead of Georgia runoff.
Gold continues to trade on the front foot after a roaring start to 2021 for TIPS, which outperformed about everything on Monday and reached new highs. It feels like there was a wave of last-ditch efforts effort to have the 'blue wave' trade on ahead of a Topsy Turvy Tuesday Senate election runoff in Georgia. We will see a pause in action today until the election results are released.
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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