US equities were up slightly heading into the close, having spent most of the session wallowing in the red. Still, stocks have lingered around record highs in recent days. But with no updates on stimulus measures amid the absence of significant macro developments to change the mood music, investors have little cause to chase any market.
US CPI came in lower than expected but was taken pretty much as a look through as vaccine distribution promotes a return to offices and travel, so the monthly readings should pick up again.
Ignoring much of the good news on the virus front this week – and despite President Biden signalling support for a swift passage of the stimulus deal – investors continued to focus on whether the proposed stimulus package risked being too big. All the while, those omnipresent nagging concerns about when governments will eventually lift pandemic restrictions continue to cloud the view.
Markets even failed to get a lift after Fed Chair Powell attempted to rekindle the Golden Age of Capitalism by pleading with the private sector to step up to the plate and create more jobs through reinvestment (I assume as opposed to investing in the markets and profiteering from stock buybacks). Indeed, it’s hard not to disagree with that call which in the past has been a proven unemployment cure-all and precisely what the recovery doctor ordered.
And understanding the delicateness of the raging market discussion around the US stimulus package, he wisely deflected any questions about whether the deal was too big. Still, he noted fiscal policy had been an essential pandemic tool to date while simultaneously asking Congress for more doubling down on the wartime economic theme.
One of the big problems right now is that active managers are not adding risk, perhaps still struggling with some undercurrents from last week’s VaR level sell-off, or simply taking a standoffish read on the US jobs data as domestic issues are starting to count again. And despite an almost 6% snap-back off the January 29 lows, the re-risking has been slow with no signs of chasing, with the word on the street being that prime brokerage leverages have been flat since last week. And options-related flows have also lacked any signs of bullish tracking with the implied vol of 1m 25d SPX calls at six-month lows. This muted buying pressure is getting reflected across most asset classes, suggesting many investors are either positioned content or willing to sit this week out to get a better look at the economic data next week, leaving ample room for risk to get added if the data co-operates.
With upcoming news flows around vaccination programs speeding up and Covid-related hospitalizations reducing, additional buying can be expected from corporates and risk control types heading out of blackout periods if realized interest rate volatility sets in.
Indeed, this has been pretty much the thesis I’ve been running with into and throughout this week. In the absence of any significant tier one economic data to steer the good ship "Recovery", investors and active managers could be sitting tight allowing the macro backdrop to shine a bit more brightly before getting their toes wet again on the "bigger and more expensive" ticket items.
Despite finding support for the large draw in the US crude stockpiles today, with excess inventories almost entirely gone – now just 26mb (2%) higher than the same point last year – oil prices couldn't hold onto gains, possibly on the expectation that Saudi Arabia could roll back their unilateral Feb/Mar production cuts and that OPEC could signal more production coming back online at the March meeting, given the sizzling recovery in oil prices.
But taking note of the pause in other markets, the mild price reversion could be nothing more sinister than the oil rally pausing for breath after hitting new 12-month highs, with Brent over $61/b suggesting profit-taking set in fundamentals remain supportive as viewed through the lens of a surprisingly big US crude draw. There’s no reason to doubt that fundamentals will justify further recovery in oil prices to long term equilibrium of USD 65/bbl and likely beyond by year-end.
Geopolitical risk factors are on the rise again, with press reports suggesting Iran is defying US sanctions; it has aggressively ramped up oil production and exports this year, in an early test of the Biden administration's resolve. While the probability of an agreement between Iran and the US that would lead to a lifting of sanctions seems low at this time, this is a risk worth following. The prospect of oil production returning to normal for Iran, implying ~1-1.5mbd of production upside, could put a cap on oil price upside this year.
The USD is mostly unchanged overnight on the back of the dovish waxing from the three leading central banks of the world, which muffles any rates volatility and takes any juice out of the differential narrative. But outside of the Bank of Japan possibly moving into negative rates, Jay Power and Christine Legarde’s messaging was very much a "steady-state" of readiness. Still, the USD's swing factor remains singularly on the market read from US fiscal policy, and with nothing new in terms of prospects for passage the USD cannot get excited.
It was a tranquil start to the New York session across USDAsia currencies – and expectedly so as we enter the Lunar New Year. Typically, a low liquidity period when crossing the spread gets a little trickier and trading volume tones down considerably.
The PBoC is unlikely to offer up any obstacle for stronger yuan post-LNY, so the yuan bulls continue to set sights on 6.25 amid the confluence of positive flow dynamics: the ongoing shift to liberalize the currency and lighter positioning after last week’s short dollar position clear out. Although the authorities have taken some steps to slow the pace of RMB appreciation, these measures are soft and not aggressive intervention-styled pushback and should not affect RMB's travel direction.
With oil prices trading softer today, and given we’re at the start of the LNY, I would expect limited foreign flows or trading in Malaysia Assets among offshore banks. So, the FX market should be relatively quiet.
Lower-than-expected US CPI print was rather fleeting and the gold market quickly reversed lower from overnight highs but remained well supported on dips on the background reflation impulse.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies