I hate to sound like a broken record, but it was definitely one of those sessions for equity markets where one needs to look beyond the broader indexes to get the whole story.
The market is holding up very well, considering how much paper came to market last night. Still, investors are taking a glass half full approach right now, no matter what, while looking out six months and running on monetary and fiscal fumes to bridge that gap. And the street remains on the elusive stimulus watch, where even a skinny offering will assuage the market's concerns regarding the never-ending bi-partisan squabble.
But the US has plenty of existing fiscal stimulus to spend, and if Congress doesn’t pass another package before year-end it's not the end of the world. US households have many savings to provide a backstop, even if this simplistically ignores those savings' distribution. And while there are mega constraints to the economy over the near term, the medium-term prospect looks bright, given the vaccine rollout is coming much sooner than expected.
There was a softer backdrop on the index level overnight as the big focus was on how the market will digest the onslaught of share issuance from Tuesday.
It’s not so much about rotation today, though the reopen trade is outperforming slightly as 10y yields continue to climb. There has been a notable pickup in single-stock dispersion and plenty of single-stock volatility, while the VIX continues to hover just above 20. Volumes are much lighter today, which is a contributing factor.
Fixed income is coming under pressure again, but unlike earlier in the week when break-evens were a major part of the selloff, this is all coming in real yields. Most of the move in 10-year rates comes from real yields with almost no change in break-evens. That might explain the rather lackluster performance in stocks, with e-minis hovering around the mid 3600s.
It’s far too early to get into the Fed pulling out of dove mode argument, although some (including myself) are already harping about that. But that’s a story for the rotation into 2022, not next month.
You’ll start to read and hear a ton of rhetoric about "peak vaccine" as some current price actions suggest sentiment is at or near the peak. EM has stopped appreciating, oil cannot rally, FX breadth is increasingly narrow with only the EUR rallying while AUD and NZD are not breaking new ground, and GBP looks soggy. The S&P 500 took out the Pfizer announcement day high and failed to capitalize. The rally in US nominal and real rates should also make it harder for the USD to sell off from here and gold to rally above $1,850.
I buy that argument into the holiday season, especially this year; investors are bound to defend profits, given we’re at a level on stocks that no one expected. Still, the latest PMI numbers print are stellar and remain on solid footings. That should set things up well for a strong global recovery, should the vaccine support growth into H2 2021 as is widely expected. Ultimately this should be a panacea for growth stocks.
I expect oil to be whippy but confined to current ranges until OPEC+ signals the all-clear for traders to shift oil prices back to recent highs.
Reports were hitting the streets of unnamed OPEC+ delegates saying that progress is being made on talks about production cuts. That, combined with the surprise US inventory draw today, has triggered a move up in oil. Discussions will continue in earnest and I think, given what’s at stake, the base case should be that OPEC+ agrees to an extension of cuts. Still, there are clear tensions within OPEC that may undermine market confidence in the OPEC+ deal from now on. It will be more important than ever for OPEC+ to present a unified front while waiting for demand to recover when the vaccine becomes widely distributed.
A smaller draw than consensus of -2.4Mb and the five-year average of -3.5Mb, but bullish vs. the 4.2Mb build in crude reported by the API yesterday helped oil recover overnight. The draw at Cushing, although not large, was to be expected; with the term structure strengthening, it makes little sense to pay for storage costs. Gasoline and distillate stocks were higher, which is the new normal. Regardless of OPEC's decision, the products part of the oil complex will continue to weigh on prompt oil prices until planes, trains and automobiles start moving with more frequency when the actual vaccine rollout effect starts to work its way through the global economy.
The weakening of the USD index over the past month is not to be ignored, which is also currently offering up a lifeline to oil prices.
Crude Oil News Roundup
Oil continued lower during Asian hours on Wednesday, pressured by bearish API numbers. Price action was mixed until a push higher from positive DOE figures that reported a draw rather than the large build anticipated by the API. Both grades gained over one dollar after the data, spurred by unnamed OPEC sources stating the group had made progress in reaching an agreement on production curbs.
The draw at the Cushing storage facility was to be expected with the shift in the curve; oil is coming out of storage as future prices no longer justify paying for the cost of carry.
According to Bloomberg, there’s another 'armada' of oil tankers heading for Asia this month. About 20 vessels, some supertankers, have been booked to leave the US Gulf Coast with up to two million barrels each. After October's record imports, China has issued more import permits to its teapot refiners for 2021, and India's processors are boosting run rates.
In a move to dramatically reduce its carbon emissions, Royal Dutch Shell is re-configuring its refineries to focus on chemicals, lubricants and bitumen that keep carbon trapped inside them. The company will downsize its refining footprint from 14 plants now to six in the future.
After getting back in the Euro on the Brexit wobble induced dip overnight, I'm out of it again at 1.2100. And if you follow my blog, you know that I think holding a currency view on these data longer than 48-72 hours doesn't make sense outside of the two or three big moves per year; we’ve had those already on the Euro and CNH.
The street believes that the EURUSD move higher is materializing, where 1.2108 is high so far. There are a few levels around 1.21, including the 76% retrace of the entire 2018 selloff and 2017 high, which acted as a pivot throughout 2018. Now that a large volume has gone through around the 1.2100 barriers, there could be a bit of a pause. Still, the street has a strong conviction in a bigger move higher, and sentiment remains intact.
I will look to get back in the Euro at some point as I find it dumb not to trade the predominant view until it gets well overbought. However, the continued rise in EUR-USD has, without exception, raised the prospect of renewed verbal intervention by the ECB. Next week's meeting provides a conspicuous forum for such a push-back, but, curiously, the exchange rate has not been more prominent among the various ECB speakers we have heard from of late, and this could be encouraging the bulls.
GBP is weaker this morning as the market contemplates the prospects for a Brexit trade deal. It was a pretty big thud heard around the trading floor yesterday when many long positioned "Cable" traders fell off their chair when Barnier's tone yesterday was designed to reassure members states that he is holding firm. Indeed, this meant from "Cable’s" purview, the two sides are still no closer to a deal. It’s getting increasingly difficult to trade the pound as gauging the likely path of negotiations comes down to a choice of which headlines to read. Headline driven markets can be a scary proposition at times.
It seems the market's base case is still a deal, but it’s probably fair to say the market is underpricing 'no deal' risk and GBP is increasingly tough to trade. Given consensus longs, the risk is for another correction lower if talks appear to stall further. A deal will likely be met with profit-taking, and the focus will quickly shift to the transition challenges ahead on a basic FTA, so topside should be limited medium-term. I suspect the next swing to 1.35 will get hammered.
There’s been little action in the ringgit since the OPEC+ meeting hit the deferment button as the local unit remains tied to the hip of the fanciful proclivities on oil markets. But as we hear from OPEC later today, I think positioning long for an eventual oil market bounce higher should be the way to play the ringgit.
Gold's seasonality flip from a typically negative November to positive December/January seems to have turned fashionable pretty quickly, with the 2.5% move higher in December already locked in the books. But please don’t chase it higher strictly on that argument; as I tell everyone, it’s not what happened in the past, but what the future holds in store. However, it is worth following the macro picture getting painted around fiscal and monetary stimulus that should be supportive. Any potential pickup in inflation stemming from those deluges next year and a possible second US fiscal stimulus package should also prove positive for gold.
Blockchain has been a point of debate for corporate treasurers for several years. Still, in recent times, Covid-19 has accelerated digitalization speed and there are signs that blockchain's time is finally arriving. Given that blockchain technology and BTC are intrinsically intertwined, hence the view now is that BTC’s time has also finally arrived.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower