The major index recovered from earlier losses to end Thursday on a high note, thanks in no small part to US stimulus efforts finding their way into the domestic jobs market.
The big beat on jobless claims certainly helped the view, down 97k to 684k and their lowest level since the week ending 13 March 2020. But idiosyncratic factors might be at play; the significant fall was driven by two states – one of which, Illinois, returned to in-classroom learning. Still, it’s perhaps a positive sign of things to come as other states go back to school.
The trend in both continues to head lower, but the tone in markets has shifted of late with commodities having taken a step back, the latest USD1.9 trn in stimulus now behind us, and nothing new of significance from the Federal Reserve.
In general, there’s more in the price now with less economic upside uncertainty ahead, so how markets react to positive data in the coming weeks – especially next week’s payrolls number – will be critical to keeping this ship sailing on an even keel.
The strong late-session comeback coincides with a decline in the VIX volatility index. It was down a massive 6.5% and below the critical level of 20, suggesting a robust late session systematic bid to the S&P500, not necessarily an active investor buy-in.
Chatter about the lack of a bitcoin bounce on the current round of stimulus checks continues at market corners, which goes back to an idea that if asset prices have been inflated by stay-at-home (think crypto, art, collectables, NFT), a re-open could take away some supports. A newly printed cash will find its way into NCAA basketball bets and the real economy now that restaurants and Vegas (aka domestic travel) are re-open for business, probably not TSLA or DOGE.
There was no specific news behind the sharp drop in oil overnight. The Suez Canal blockage's transitory nature gave way to general nervousness around rising Covid-19 cases in Europe, India and Brazil. And with an enduring safe-haven bid under the US dollar continuing to pressure oil prices, eventually the trap door sprung which triggered a ferocious sell-off.
And while sentiment was thrown an economic lifeline in the form of quickly repairing the US jobs market, it did provide a soft bed. But the bearish sentiment seemed to be winning out as the bounce was unconvincing.
Given the rush for the door over the past week, there could be some systematic de-risking adding to the momentum as the contango in oil is signalling that we may be entering the beginning of the end of the oil reflation trade as the market starts to price in the "reality check", as opposed to the "stimulus check" with the pandemic surging again around the globe.
Renewed lockdowns in Europe have dampened the immediate outlook for European oil demand. At the same time, UK politicians provided a not-so-subtle reminder that it's far too early to consider flying to the sunny shores of the Mediterranean and disrupting hopes for a rebound in air travel.
Indeed, the reimposition of lockdowns in Europe and the resurgence of Covid-19 in hotspots worldwide does little to improve the prospect of regional travel and leisure sectors. Now, even what small glimmer of hope there was around summer travel re-opening would be questionable given the new global spread and concerns over the new variant.
Yes, the pattern around European lockdowns has been to fade the fear around the growth implications. Still, the backdrop in past lockdowns included a lot of upside speculation around the upcoming fiscal stimulus. But now the $1.9tn in US stimulus is behind us and eye-grabbing headline numbers of $2tn, $3tn and $4tn for infrastructure packages are out there, the uncertainty now is more around how long it will take to deliver and how high taxes may fund the spending.
The dollar bulls were rewarded by staying the course and betting on the run of more robust US economic data after the US jobless claims beat expectations.
The Federal Reserve is almost going out of its way to warn the markets it will not step in and somehow control yields. It seems the path of least resistance for the US dollar should be higher as the US economic data improves and yields move tangentially higher.
USDJPY sits comfortably above 109 after BOJ Governor Haruhiko Kuroda's comments that it was too early to think of exiting accommodative policy, including ETF purchase. The slightly firmer US yields posting better than expected jobless claims rounds out the support.
So, front end rates remain well-behaved, buying into the lower for longer mantra. But if the data improves and the front end reprices higher again, the dollar gains big. The very moment the market convincingly decides the Fed will be on the move in 2022, you don't want to be short dollars in that scenario.
The Malaysian Ringgit
The latest oil price meltdown and the current dash for dollars (USD) have wholly eroded any glimmer of near-term hope for the ringgit. And with UK politicians providing a not-so-subtle reminder that it's far too early to consider flying, thus disrupting hopes for a rebound in air travel, it could all come home to roost as local politicians may heed a similar tone and become less inclined to open borders this summer, hurting the local re-opening narrative around travel and leisure that was getting priced for a perfect lift-off.
Gold is trading a bit softer after robust US economic data pushed the US dollar higher and underpinned US yields overnight.
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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