Some things will snap back to what they were before. Others will not. Vaccines offer the promise that the major disruptions of the pandemic will fade from the scene in 2021 and economic life will gradually heal as the world will start to move on from all the human suffering that the virus has wrought.
US equity futures opened up a bit higher out of the gates this morning as vaccine economics still resonate to a degree. However, considering some of the most recent developments, we’re still likely to be in a muddied environment for risk in the coming weeks. Janet Yellen, as incoming Treasury Secretary, would need Republicans to play ball on stimulus but unless the Democrats can win the Georgia run-off races (where betting markets currently favor Republicans at just under 70% probability), Senate majority leader Mitch McConnell has given no indication yet that he will budge. Anyhow, risk as seen through US stocks lens has so far notably struggled to follow through on its momentum since the positive news from Pfizer and Moderna.
With the arrival of the vaccine, gains in global equities are likely to be front-loaded. Europe should outperform the US over the coming weeks and months. Value's relative performance drives Europe's comparative performance to the US to growth (Europe is more heavily weighted in banks and energy and the US heavier in tech).
It was a hugely active last week in Asia despite the US holiday as the street pointed to this week's MSCI rebalance driving activity, especially with bumper inflows into India. The growth/momentum to value/cyclicals rotation has slowed but not died. Trimming winners and adding financials continued in HK/China and Singapore. Index futures and derivatives, meanwhile, had more upside added in Singapore, India and Japan.
Oil cautiously lower with no definitive pre–OPEC meeting guidance to pilot the markets.
There was enough concern in the ranks for the OPEC+ defacto steering committee comprised of Russia and Saudi Arabia energy ministers to call an informal consultation for the Joint Ministerial Monitoring Committee via video call on Saturday ahead of today's OPEC+ gathering, but it was to no avail as a public statement supporting a current quota extension remains elusive.
With no definitive pre-OPEC meeting guidance to the pilot markets, caution is warranted ahead of the meeting’s conclusion. The recent oil-price rally may have reduced OPEC's sense of urgency. With signs of disharmony within the group, there’s a possibility the OPEC+ meeting will fall short of those expectations. An extension still seems the most likely outcome, but risk/reward is skewed to the downside as oil is unlikely to move up meaningfully (recent post highs) if an extension is announced.
After a fairly patchy and extremely illiquid 48 hours heading into the weekend, traders began to question the base case of a three-month supply-cut extension, which may largely be priced in already, suggesting unchanged prices on an agreement as expected, or a downside of -10% on an OPEC+ failure to agree. Nevertheless, both WTI and Brent finished up about 8% and 7% on the week respectively, posting the fourth straight week of gains.
OPEC+ actions will be key. OPEC+'s two-year-long strategic agreement aligns the group's production silhouette with demand while ensuring that the alliance continues to supply half of the world's needed barrels, in line with its market share and simultaneously drawing down inventories.
Consolidation has set in after a strong rise in crude prices over the past 2-3 weeks, and thanksgiving holidays also reduce volumes. Still, traders remain constructive on oil market recovery, but inventories have yet to come down to normal levels. OPEC+ spare capacity is at historically high levels, with 2021 needed to deliver considerable demand improvement. Indeed, a successful vaccine rollout program will snap the nasty-for-oil price correlation between infection and mobility.
After the recent oil price weakness, the Brent curve's front has moved back to contango, but the backwardation in Q3 2021 remains. Where the two grades differ is in the shape of the curve for 2022. While the Brent curve returns to contango early in 2022, WTI is backward until late 2023. Expectations for the two grades are therefore very different.
After supply-dominated price dynamics over the previous business cycle, Covid-19 containment measures have turned demand into the market's dominant driver, and this will continue to be the case until a successful vaccine is fully rolled out around the globe.
In the lead-up to today’s major OPEC meeting, the Axi Expert Series is pleased to welcome Henning Gloystein, Director of Energy, Climate & Resources at Eurasia Group, to discuss his views and insights in what’s an important week for oil markets.
It’s been a one-way street since the vaccine news, and gold continues to sell off aggressively amid a combination of liquidation from macros, CTAs, ETFs and a lack of physical demand meeting good-sized buying from longer-term names, but it is well absorbed.
But the ETF overhang offers up a pretty chunky target for Gold ETF to go after, and Gold SPDR length could be the yardstick for gold convictions. Just as Gold ETF attracted a lot of bullish attention when gold was on the way up, the ETF could attract a lot of bearish attention on the way down and could be a significant source of supply.
25% of the Gold SPDR position weight was accumulated between $1700-$1800, so a further $50 or $60 price drop could trigger a massive clear out. Indeed, this would suggest that if the $1750 psychological and technical support area does not hold, the risk of a deeper correction could swell by ETFs' potential to capitulate.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again