The Week Ahead
As we move into February, the focus will remain on the coronavirus pandemic and the rollout of vaccination programmes, especially with the EU facing criticism at being slower than the UK and the US.
Otherwise, attention will be on data releases, with both the PMIs for January and the US jobs report coming out next week, as well as earnings season where next week's releases include Amazon and Alphabet. Finally, on the calendar, there's also the Bank of England's latest decision on Thursday.
Pessimism runs rampant
Since China's Covid-19 resurgence, a more pessimistic take of the pandemic outlook has taken hold. There has been a view that vaccines might have been 'oversold' as the pandemic solution, mainly as existing vaccines are less effective against mutations.
When you combine that mood changer to the logistical distribution problems, particularly in Europe, you end up with substantially more extended lockdowns than initially hoped for, with economic activity likely to get battered in Q2. So, it’s no wonder market sentiment has turned more pessimistic.
Populations – including investors – are tired of lockdowns, and now they’re getting tightened once again.
The VaR related risk shockers
VaR-related risk reduction usually happens quickly and ends fast as the reasons for the disruption get disseminated; the barometers used to measure risk across the financial industry then respond favourably in kind. But it doesn't lessen the agonizing experience to be on the wrong end of the stick when so many stops are triggered and consensus positions get cut around the same time.
So, as we move past the current risk reduction episode, it's worth reviewing the past week to establish the path forward. In addition to the big short squeeze in stocks, fears around Covid-related risks in Europe also drove underperformance in European assets and oil prices.
In past episodes of European Covid flare-ups, the pattern has typically been for the underperformance to occur as expectations for lockdowns rise, and then to stabilize once those lockdowns are announced. On this front, we may be getting the next round of lockdowns very soon, judging by German Chancellor Angela Merkel's recent "the pandemic has slipped out of control" comment. Indeed, this should make the EURUSD unattractive as it could lead to the ECB easing until the messy vaccine distribution corrects.
On that front…
The distribution of vaccines has also lagged in Europe, but with the region becoming very proactive about the issue, expect to see some improvements on this front, whether directly or indirectly. Meanwhile, stimulus negotiations continue to progress in the US and may not end up far off from the $1.9tn (and could end up even larger). At the same time, Powell went well out of his way on the FOMC press conference to sound as dovish as possible within the current policy stance's confines.
Ultimately, we’re still moving towards a recovery from the pandemic – the ride is just a heck of a lot bumpier than anyone had expected. Yet, the recent stock market washout may have put the path forward on a cleaner footing.
Commodity currencies have been underperforming because China tightening should breath more comfortably this week after the PBoC injected liquidity and later went into damage control mode, suggesting they have no intention of raising their bench market lending rate or Standing Lending Facility (SLF).
After aggressively draining cash from the system in the past four sessions, the PBoC finally net injected liquidity via OMO Friday to meet month-end and Chinese New Year cash demand.
There have been zero commentaries on what to expect from OPEC+. Still, I would be surprised if a push for an incremental production increase in March, given renewed concerns about the global economy's recovery pace. The OPEC+ group remains committed to controlling supply and I'd expect the meeting next week to underscore continued efforts to improve compliance and stay responsive to uncertain macro conditions.
The pandemic has been an extraordinarily disruptive event, where the rich got richer and the poorer, well, stayed poor. It could be an overture to a more significant societal disruption, via a fourth industrial revolution, and its fundamental principles like equality could inspire a massive wealth transfer over the next few years. As the name suggests, an industrial revolution is revolutionary, but instead of storming the Bastille it's about like-minded humans finding a digital community to virtually "Occupy Wall Street” – another example of the classic David vs Goliath story.
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