Suppose you consider where we are now in US politics versus the pre-election Trump heyday when Trump was a lock-in to win the 2020 election, notwithstanding the fact we’ve gone through four seasons of political landscaping compressed into months rather than years. In that case, it’s astonishing that we’ve made it through the morphing of the political shades with the stock market still trading near the high end of the historical ranges. Mind you, the political overhang could last a little bit longer as sentiment was getting soured and held back by protest in Washington overnight.
Still, not only is there a growing sense of relief among investors that the final election hurdle has crossed, but the markets are slowly coming to terms that this might be the best-case US senate outcome via a stimulus perspective complemented by a growing understanding that a Biden administration could make a big difference in coordinating and pushing out a national vaccination strategy that will bring herd immunity in the US much quicker than anticipated. Indeed, the latter could be an even more massive driver for positive US risk sentiment in H2 than anyone had counted on – however, only time will tell.
The second derivative of US vaccinations will drive equities at the index level and provide a key signpost for oil markets. As people get vaccinated, they’re likely to return to those activities most impacted by Covid-19, such as dining out, travelling and other personal service-related areas. So, the number of people vaccinated is also a leading indicator of shifts in consumption.
But there’s still a lot of wood to be chopped over the next few weeks. Even though we’re bearing witness to the market’s keen knack of ironing itself out quickly, the most important question now is the sequencing of the Biden policy plan; hopefully, for investors' concerns, it's in order of stimulus, infrastructure and tax changes. While Biden could theoretically get the ball rolling and undo many of the Trump tax cuts for corporations and wealthy individuals on day one, I cannot imagine that tax hikes are the priority number one when the current mandate is to rid the US of the virus and get the economy roaring again.
Given the high unemployment rate and massive economic pain, punishing people at the top end of the pay curve makes no senses at this point. While the much more pressing matter of a raging pandemic and glaring absence of a national vaccine strategy will lead the recovery charge, tax policy may wait until 2022. On the other hand, many expect tax hikes sooner rather than later, so this is an evolving story and an important one to watch.
Oil is still holding up well, supported by anticipated Blue Wave stimulus effects and the surprising announcement by Saudi Arabia of a voluntary one-million-barrel production cut for February and March, even though the not-too-rosy DOE builds in both gasoline and distillates more than negated the draw in oil. Gasoline and jet fuel remain the main drag on the demand recovery.
US crude inventories fell by a whopping 8.0mb w/w. Strong crude exports of 3.6mbd resulted in low net imports overall; shockingly, oil exports from Saudi Arabia plunged to zero for the first time. When factoring in the gasoline and distillate side of the equation, demand is still tepid and that should limit top side market ambitions over the near term.
Still, I suspect some Chinese refineries are back on the spot market bid after being startled by Saudi Arabia and its 1m b/d oil production cut for February and March. Most models had oil prices sliding slightly lower in Q1, reflecting the signs of weakening demand as lockdowns return. Saudi's pre-emptive strike and the prospect for a tight market in 2Q21 should continue to support oil, possibly via the China demand in Q1 although not without a few hiccups as demand recovery slows with infections rising again quickly in other colossal Asian oil importers like Korea and Japan.
Markets are repricing the Blue Wave and the near-term implications of a mild pushback against the massive consensus short US dollar trade. However, 1.2280 held firm overnight after the dollar attraction to higher yields vs the EUR gave way the risk-on sentiment.
The FX market's reaction to the results emerging from Georgia's Senate races is a standard "risk-on" move. The high beta AUD, NZD and NOK have shown the greatest strength, justifiably capitalizing on improving global economic activity expectations fostered by increased US fiscal spending. These remain some of the most favoured G10 currencies for 2021.
The EUR, tantalized by the "risk-on" mood in FX, is hindered by downward revisions to the services PMI. December's final reading was moved to 46.4 from the flash estimate of 47.3, with a downward revision to Germany. The weakness is not so unsurprising given Covid-19 containment measures and, as many have been extended through January, the next reading is also likely to remain weak.
The pound is coat-tailing the same influences that the EUR is falling.
However, outside of the high commodity beta currencies, the dollar's outlook is less clear-cut than stocks and rates in my view. The risk-on sentiment is dollar-negative as capital gets allocated elsewhere. I think that trade still happens, but to a lesser degree – nevertheless, the cyclical rotation in the EU stocks looks to inviting over the immediate term. And I think G-10 traders that have made boatloads on the long AUD and CAD since December 30 (those along with the EUR longs were my Best in Show call on December 30) are still willing to ride the long EURUSD to 1.2480 or stop out 1.2178 over the next week. Mind you, that’s just how I see playing it out through next week.
Still, suppose the Biden administration can successfully and aggressively push vaccination efforts that lead to herd immunity in H1. In that case, the US economy will recover quicker than Europe, and that should give the US dollar a leg up which runs against the grain where most market commentary converges on a new downward dollar cycle taking hold.
Some positive news for the minority dollar bulls is that the trade-weighted dollar is holding up. The buck is starting from a massive weak point this year, and the ECB and BoJ are not going to sit back idle and watch their local currencies appreciate without some countermeasures. The PBoC has already instructed a few big Chinese banks to sell the yuan on notice, which looks highly likely to be window guidance by the PBoC.
Gold gave way to surging US yields and a surprisingly resilient US dollar as the market starts to factor in not only a reflationary bounce but a quick path to herd immunity via a sounder US vaccination policy under a Biden presidency.
The US 10y yield is up to 1.049% – up 10bp today and 14bp this week/year. To put that into context: yields fell 16bp on the day after the US election in November, but on November 9 there was a similar shift with a 9bp yield gain. Yesterday was a big move, but not out of the ordinary. With treasuries, what's more important is the mix between real rates and break evens.
Real yields entirely drove the early moves in treasuries, but since NY came in the mix has shifted and so far today inflation now accounts for 10bp and real yields 4bp. That breakevens are back leading makes sense given the outlook for more US government spending. And that’s consistent with the view we articulated yesterday where it’s real, not necessarily notional, that the balance of market risk lies in the higher yield outlook.
But stealing much of gold’s glittering appeal is Bitcoin which is looking to extend its glorious run.
The chase higher is back on, based on the notion that bigger main street investors are interested in building longer-term positions. And with deeper pockets in the game and some expecting to quintuple their return in the next few years, it’s safe to say those big buys will be getting stored in the hard drive collecting dust for the next few years and are unlikely to come back to the markets any time soon.
When you consider BTC is a finite asset, these large purchases can significantly impact buyer sentiment. Now the fear of missing out does really set in from a scarcity perspective.
Within the broader narrative, I think this is all about the new age embracement of blockchain technology to which BTC is so uniquely intertwined.
For more market insights, follow me on Twitter: @Steveinnes123
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