US equities slipped again Thursday, with the S&P down 0.2% heading into the close. Oil was up 3%+ with Brent contracts above $50 a barrel for the first time since March. US10Y yields were down 2bps to 0.91%.
While the stimulus deadlock is proving to be the ultimate rally capper, it was the gnarliest of Main Street concerns that hurt sentiment overnight, weighed down by more signs of rising infections taking a toll on the US economy; there was a spike in jobless claims last week, up from137k to 853k. The employment picture must be highly concerning for anyone who feels economics is driven by multipliers, and this remains a huge drag on the global economy.
Of course, this cries out for more stimulus, which is the market’s default fallback position, as investors remain very hopeful that Santa's sled will land with the US stimulus package in tow.
But so far there have no breakthroughs on stimulus and sticking points remain, although some amalgamate in the package's overall size at around $900bn, which is encouraging to a degree.
Overall, the US equity market is resilient, but away from capital markets activity things are notably quieter, with many single stocks trading around 70% volume vs. the 20-day moving average. Mega-cap tech, for the most part, remains a source of funds for rotation; I don’t foresee that changing as we head into next year.
The energy sector was the star of the overnight show.
The star of the show overnight was the energy sector, with Brent currently sitting 3% higher on the day (50.33) and rising above $50 a barrel for the first time since early March, fueled by vaccinated hopes of a faster demand recovery. An unwavering dip-buying strategy has enveloped markets as the combination of OPEC+ quotas, which are expected to keep the market floating on an even keel through the petulant northern hemisphere winter and improving road fuel demand is seen as rising faster than expected with the emergency roll out vaccine globally. And this is without a US stimulus package, which could offer yet another bounce to oil prices.
Asia continues to provide much of the backstop for physical, with unquenchable oil purchases by China teapots and multiple Indian producer tenders in the pipeline. And the softer USD dollar is helping the overall commodity cause.
Big oil traders appear to be strategizing their 2021 outlook a lot faster and more bullishly than expected. But, really, is it much of a surprise with multiple high-efficacy vaccines inoculating parts of the world before Christmas? We could be seeing some front-running buying ahead of the EIA, and the Paris-based International Energy Agency, which next week will provide an important year-end sense-check as investors consider positioning into 2021.
My major concern is not about the logistical issues of vaccine rollout. It’s more about the re-emergence of OPEC+ 's internal pressure as prices move higher. Any renewed fissures or news that pushes back the point at which OPEC+ can step back earlier from a more active role managing supply will provoke a sharp sell-off in oil. With that in mind, volatility will most certainly head higher ahead of the next OPEC+ meeting in early January, and while the recent rally leaves oil at risk of profit-taking into year-end, fundamentals support oil prices at current levels and suggest there will be multiple forecast outlooks getting rewritten in short order.
Oil continued to rally today, completely disregarding the huge stock build reported yesterday. WTI traded to a high of $47.74 and Brent broke through the psychological level of $50 a barrel to a high of $51.06. After moving back to contango at the beginning of the week, the Brent curve's front is back into a steep backwardation with Feb21 $0.13 over Mar21.
The front gasoline crack rallied almost 13% yesterday and continued higher today, adding another 9% before retreating to around $8.65 a barrel. Refining margins have been depressed for gasoline refiners since the pandemic as they’ve struggled to turn a profit with margins below $10 a barrel. The heating oil crack has put in an impressive performance, gaining over 37% since the end of October (currently trading at $13.50 a barrel).
Brexit and the Pound
As the odds of a no-deal Brexit climbed, the UK curve continued to "bull-flatten" on Thursday and there’s been a greater tendency for more jittery GBP longs to hit the sell button, although market view remains that a deal is slightly more likely than not.
However, talks are continuing into next week, which is not necessarily a sign of progress. As such, there’s an increased element of time decay to the probability of a deal. Time decay is an easy concept to grasp via optionality but much more difficult to explain from a psychological perspective from the G-10 hot seat, but it often leaves traders in a disagreeable predicament.
ECB and the Euro
Non-FOMC central bank decisions have been close to irrelevant in FX markets this year and today's ECB meeting was consistent with that trend.
By any measure of central banks' success, the ECB meeting was a flop. The euro strengthened slightly, bonds sold off, inflation expectations dropped, and bank stocks came under pressure. Investors had speculated for weeks about the shape and size of today's 'recalibration,' fuelled by various media stories based on official 'sources.' On the exchange rate side, I had suggested that mentioning the possibility of interest rate cuts might have had some currency impact.
Neither the introductory statement nor the press conference contained anything that could be characterized as increased concern about the stronger euro. Together with the overall slightly hawkish flavor of the communication, this pushed EURUSD above yesterday's highs. Taken at face value, the additional lending benchmark introduced to make the 12m extension could be viewed as marginally hawkish. There was a (very) mild tightening in FRA-OIS forwards on the day.
Lagarde On FX
"We do not target exchange rate, but clearly, exchange rate, and in particular the appreciation of the Euro, plays an important role and exercises downward pressure on prices," European Central Bank President Lagarde said. "So, we monitor it, we will continue to monitor it very carefully going forward".
Despite the spot move higher, EUR risk reversals stay bid for downside in the front end, suggesting a continued abundance of topside barriers with the spot in Asia at 1.2142. Brexit uncertainty will probably hang over EUR into the weekend; the intraday down-trend comes in right now at 1.2140.
The commodity currency linkers are still high flyers. Nickel has broken $17,000, up almost 2.5%. The dollar sell-off helps metals, with a sharp rally also seen in copper. As such, the Australian dollar is holding sturdy above .7500.
The Canadian dollar shifted into overdrive with oil prices screaming higher, but pre-weekend profit-taking set in ahead of 1.2700.
The Malaysian ringgit stands to perform well, being the beneficiary as Asia's biggest oil producer with Brent crude soaring above $50 per barrel. That move in oil should equate to the ringgit trading on the 4.5 handles.
And with the vaccine rollout, the ringgit also stands to gain from more exports heading west. Simultaneously, the thriving Malaysian travel industry should receive a huge bump in tourist activity once air travel lanes finally open up more freely. I, for one, dearly miss my visits to KL.
As we move into 2021, I would expect gold will simply become an inverse reaction function of the US dollar, which prevailed from 2010-2018. If you think the EURUSD goes to 1.25, you unequivocally need to own gold.
In the meantime, given the lack of progress on the US fiscal deal, the next and possibly more powerful knockdown to gold and silver could come from growing optimism over the vaccine. There’s enough positive vaccine feel good to keep gold and silver pressured near-term. The FDA approval could come as soon as Friday or Saturday, with the first US injections happening on Sunday or Monday, said Moncef Slaoui, chief adviser to the Trump administration on vaccine development. The vaccine may continue to undermine gold and silver's "safe-haven" demand as it gets rolled out. Still, if we get a pre-holiday Christmas deal, gold fortunes.
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Today’s key charts focus on oil, where the recent rally has stalled amidst talk of a lift in sanctions and speculation of a production boost.