US equities were stronger on Tuesday, with the S&P up 1.3% heading into the close. US10Y yields were up 2bps to 0.91%. A Zoom summit between US congressional leaders to discuss a narrower stimulus package, worth $748bn and bypassing contentious elements, has renewed hopes of a stimulus breakthrough (the summit is in progress as I type this).
The prospect of a rising stimulus tide lifting all boats has seen investors revel in holiday cheer as a healthy cocktail of progress over an economic relief package in Washington, Brexit deal optimism that could settle by week's end, and the likely seamless rollout of multiple highly effective vaccines have mixed to paint trading screens Christmassy green – this despite the numerous headwinds from the virus spread and growing risk of increasingly tighter mobility restrictions. All the while, investors sit between sixes and sevens regarding the makeup of the stimulus package itself.
And while it will be a slower economic recovery without the stimulus deal, today the markets are wholeheartedly banking on that deal to provide the ultimate footbridge towards vaccine rollouts. However, the concern is that after the initial bounce, the market then pivots to a day late, dollar short mode – especially with the US employment situation waning and the Covid-19 spread handcuffing the economic recovery due to the current lockdown siege. This is even more so with the realization that additional stimulus deals in 2021 could be even tougher to table if the Republicans win Georgia's Senate runoff. It could be that all roads eventually lead to Georgia.
US House Speaker Nancy Pelosi on Tuesday invited top congressional leaders to meet at 16.00 New York to discuss coronavirus relief and government funding. According to various news outlets, Pelosi invited Senate Majority Leader Mitch McConnell, Senate Democratic Leader Chuck Schumer, and the House Republican Leader Kevin McCarthy; this is probably a positive sign for a Covid-19 relief bill, for which Friday seems a pretty hard deadline. Only two and a bit days to go…
There’s also a "big buzz" among Tory MPs that the UK is heading towards a Brexit deal this week. The UK has dropped a stipulation for renationalizing fishing vessels, and the two sides are grinding through details to level the playing field. It will be interesting to see what happens to GBP; at, or above, 1.35 in recent sessions, it has sold off. Remember, ultimately, this would be a skinny trade deal that would do little to help services, so it’s hard to be jumping for joy on this news.
But, again, looking at the US equity indexes only paints half of a whole bullish story and the below-the-surface roller coaster continues. The reopen trade leads the rally, but growth is holding up relatively well despite plenty of red in mega cap tech. There are some serious moves higher in SMID cap growth, in particular in the e-commerce space. Indeed, this has been a now for a couple of weeks now as we continue to see the unwind of the multi-year long mega cap tech trade as regulatory scrutiny weighs and folks are moving out the risk curve.
Oil markets are revelling in stimulus-driven risk appetite as the healthy cocktail of a US economic relief package fused with vaccine tonic provides the ultimate sentiment lifter, to the point where the oil market is even a bit giddy.
The API data missed on the wrong side for oil bulls, but with so much stimulus optimism stuffing oil barrels at the moment, any push lower could be viewed as an opportunity to buy with crude stocks trimming again this week.
Oil managed to trade higher after weakness in Asian trade. Bulls seem to be placing all bets on vaccines' rollout, with a sprinkling of Christmas stimulus fairy dust to help matters along. The backwardation at the Brent curve's front has steepened further, but the front-month came USD0.17 from the USD51.06 high posted last week. The Arb tightened to -USD3.02 from -USD3.14 yesterday.
Overnight it was the IEA's turn to sound a note of caution and realism that the vaccines' impact on demand will not be felt for several months. Predictions about the time it takes for the oil overhang to start drawing and impacting are being pushed further towards the second half of the year.
Still, China's November crude oil throughput set a new record of +3.2% year-on-year. The running assumption here is that if OPEC only increases output by drips and Chinese demand continues filling current and newly built storage tanks, the global surplus will dwindle faster than expected as mobility gets supercharged with the vaccine rollouts.
Specs buying has continued across both grades and products, with Brent remaining the largest recipient – albeit at the slowest pace since effective vaccine announcements. The ratio of longs vs. shorts now stands at almost 4.5 to 1, the largest since January. Naturally, such an unbalanced positioning could result in a dramatic selloff should sentiment shift.
Despite the macro uncertainty, the efforts of OPEC+ should continue to drive a reduction in global oil inventory levels that will support the oil price as global demand gradually recovers to normal levels, possibly quicker than expected thanks to the vaccine.
Improving risk appetite has seen diminished demand for the "safe-haven” dollar as the US fiscal negotiations and Brexit talks endgame in sight. And the short dollar tactical play is in vogue for a possible FOMC policy twist.
Nudging Asia FX along China's activity data for November showed clear signs of further recovery, although the bounce in consumer spending is comparatively sluggish.
AUD's correlation with US equities has been a consistent factor since February and saw the AU$ push higher overnight. Meanwhile the Brexit mood music is definitely danceable this morning as optimism over a week's end deal grows.
With Malaysia's budget passing the third reading in parliament, higher oil prices and reveling risk sentiment over a US stimulus deal should see the ringgit trade on a favorable note today as sentiment could shift to refocus on the ultimate 4.0 target, if the ringgit moves into full out catch-up mode.
Most Asia central banks' guard against FX strength remains elevated (especially North Asia, INR and THB @30). As such, the catch-up plays in MYR and IDR are cleaner tactical plays to position for a sustained rise in commodity prices into early 2021 and/or a more dovish FOMC this week.
Yen in focus
G10 FX is stuck in a rut short term as the pressure on USD/Asia has abated a bit, recycling flows have stopped, gamma is plentiful above 1.2150 in EURUSD, the cable can is kicked and kicked, and USDJPY coils tighter and tighter.
A daily close below 103.00 or above 105.00 will be interesting and should be the key to opening the short-term channel. My lean is to the topside, given where rates, gold and Nikkei have gone over the past few months – but I’ll wait for it to break, given the no signal at current levels.
Gold is bid on the prospects of more stimulus. The downside looks solid as traders should continue to accumulate on dips towards $1,810-$1,820 in the near term, with Wednesday's FOMC still the main event of the week. XAUUSD has resistance at $1,875.
I suspect this week's gold buyers could stay long through the FOMC, where thoughts of a dovish tailwind are also starting to push gold along.
With the poor medium-term outlook for the employment sector, no one seems to have a solution and should keep the Fed on the 'lower for longer' course, and probably for as far as the eye can see.
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Investors are still digesting the latest statements from the US central bank, which surprised markets with a far more hawkish stance than expected