US equities tracked sideways again with markets remaining metaphorically stuck in a clingy sweet spot as confidence in a post-pandemic recovery's strength keeps risky assets supported. Still, the run of poor US economic data continues to fog up the looking glass. Nevertheless, that weak financial data – as viewed through yesterday's jobless claims miss and Friday’s NFP double clunker – prevents the Fed and the White House from delivering anything short of full-throttle overdrive policy support, with lots more "charcoal in the snow" to come.
Tempering risk sentiment overnight, US10Y yields recovered yesterday's fall, rising 3bps to 1.16% as investors perhaps realize despite Fed Chair Powell is doing an admirable and useful job of pouring ice water on rising US yields. The asymmetric risk is firmly in the other direction approaching the next tranche of the fiscal stimulus – even more so after a soft 30-year US bond auction that saw long term investors back off and begin to acknowledge that the anticipated economic recovery will have the potential to lift yields much higher than they are today.
Investors hotly anticipate the US reopening – and the economic recovery could come faster than expected. But in-demand stocks are already priced in for a relatively strong recovery as most of the easy trades around the traditional cyclical sectors (financials, industrials, materials and energy) levered to the US reopening, driven by the reflationary fiscal and monetary actions taken during the pandemic, have been consumed. Indeed, it feels like all the easy trades have been had, and now the real "through the looking glass" work begins trading off the back of economic data. Global markets continue to trade mixed, echoing that sombre ecnomic data view as participation remains muted, suggesting that investors need a bit more cajoling by more robust economic data before getting back in the saddle.
But this is not to suggest the next phase of the stock market upswing will force investors to find shiny needles in a haystack of stocks. There are still significant opportunities among single-name consumer stocks around travel, leisure, retail and restaurants but we’re not entirely there yet as lingering lockdowns and vaccine rollout doubts continue to dot the news wire. Still, with vaccination rollouts on turbo boost and the current lockdown abatement doing what it’s supposed to do by taming the spread, there’s a solid chance that reported Covid-19 cases could shift close to zero in Q2 and an early Covid-19 fiscal package plus a multi-year infrastructure package later in the year. As a result, the economic mood music should attune higher in March and could surge in Q2.
Two downward corrections from Brent mid $61's on two consecutive days suggests the markets got positioned a bit peaky, especially after the IEA delivered a reality check and revised down its global oil demand for 2021 and warned the market recovery is fragile.
The oil market is a very sentiment-driven beast. There might be a growing sense that commentary and analysis got slightly too far over its skis as the price corrects upwards, even though the data does not suggest a significant change in the near-term outlook. As such, the IEA release provided the market with a vital sensibility check.
But, in reality, this is a supply-led rally that largely hinges on a restrained OPEC+ until demand fully recovers. Many bullish forecasts are predicated on inventories declining further amid OPEC compliance as the return to demand normalcy will happen in 2022. To have a bullish view of the oil world, it needs to centre on OPEC+ supply discipline in a world awash with spare capacity and extensive inventories. These are the kind of assumptions that could end in tears should supply return faster and trigger a swift and painful correction.
The importance of OPEC+ on the bullish viewfinder also means the group's March 4 meeting takes on an even higher level of significance than usual. It will be necessary for members to put political differences aside and remain focused on delivering the coordinated action that the market needs while, at the same time, demand gradually returns to normal. But given this meeting could be a dangerous beast, it might also cap oil prices until early March. But that’s going out on a limb as oil prices seldom, if ever, find an equilibrium amid a running of the bulls.
Slightly higher US yields, a rotation shaky US stock market and lower oil and gold prices hit FX's recent darlings, the commodity currencies, overnight.
Currency markets are completely non-reactive to Chair Powell watering down any taper thought, which makes sense given the FX market focus is on the post-bond market reaction to the US stimulus package where the asymmetric risk is in the other direction from where Chair Powell is trying to herd the market ahead of the next US stimulus tranche.
Weaker oil prices and slightly higher bond yields paint a less appealing view for the Malaysian ringgit. But, as with all Asia FX pairs, trading will be limited as everyone in the region celebrates the start of LNY. Liquidity will be priced at a premium, making it challenging to cross the spread suggesting local currencies will only be reactive to more significant dollar moves in G-10. And on that front, don't hold your breath – especially with the big three central banks (FED-ECB-BoJ) sitting in "Steady -State" anchored on the "Dove Boat" where volatility juice is tough to find at breakfast.
Gold remains mired in a world of cross-currents. While London, as usual, found a few golden nuggets in Chair Powell’s dovish retort, but with the US dollar sailing on an even keel these days there was little fresh impetus to push bullion higher.
And with the pop on US yields after a shaky 30-year bond auction, traders then began to factor the risk for higher yields around the next tranche of the US stimulus package. And to fog the view even more, oil prices fell overnight, watering down the inflation premium.
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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