US equities fell Friday with the S&P down 0.1%, while US10Y treasury yields were down 1bp to 0.9%. The US stimulus impasse, no-deal Brexit concerns and the omnipresent rolling lockdown holiday siege are weighing heavy on investors' minds. So, it seems we could be stuck in the positive vaccine then negative Covid feedback loop, just waiting for a stimulus check to arrive.
In truth, the headlines on the US fiscal stimulus are all too familiar, but there’s little sign of any movement in resolving divisions over the primary components. Squabbling continues over government aid to the states and Covid-19 liability protection for businesses. Given these talks have been running since July, the market may be bored to tears, but if the stimulus door slams shut before Christmas it could still change the positive vaccine mood music.
Both sides met overnight in the latest iteration of the Brexit saga, resulting in a can-kicking extension. Still, PM Johnson quickly pointed out that both sides remain far apart as we enter another round of high-stakes brinkmanship. Both sides want to avoid being the ones walking away from negotiations; however, whether such an extension would be only for show or signal a real and realistic attempt to hammer out a deal is the real question.
In rally relief fashion, sterling traded up +143 to 1.3366 in the early gappy gray zone (Wellington) but has started to sell off as liquidity comes back to the fore. So, with the worst case, a no Brexit deal global risk reset this morning, investors can breathe a morning sigh of relief – temporary as it may be.
To the extent this Brexit detente holds up remains the most pressing question as no Brexit will continue to worry investors, with UK ministers telling supermarkets to stock up for a no-deal Brexit that could take up to three months to resolve a vegetable shortage; unquestionably, this could make Covid-hoarding look like small potatoes. According to the Ministry of Defense, the Royal Navy has put four patrol boats on standby to defend UK fishing waters on an even more ominous note.
And all of this will put the Bank of England's back against the wall. Already this morning, the Bank of England economists are out warning the market they are running out of policy wiggle room, noting that QE at this stage will prevent tightening but will not add more stimulus at this point.
US near-term growth worries
Near term growth worries in the US also intensified Friday, with growing virus infections and hospitalizations causing NY Governor to halt indoor dining, in effect from Monday. This suggests investors will again be tasked with gauging the vaccine rollout against the near-term negative impact from soft lockdowns, which leave a nasty psychological impression on consumers who could stay at home to protect families over the holiday season.
But on a positive risk note, the FDA approved the emergency authorization of the Covid-19 vaccine and there’s the suggestion that supply constraints will be overcome quickly, as a convoy of trucks is already making their way from Pfizer Kalamazoo headquarters to US hospitals. The Airline industry is also kicking in by offering idled planes as vaccine cargo haulers. Indeed, this will help assuage some of the market’s growing laundry list of near-term economic worries.
IPO and M&A mania
Eventually, the greater risk is still for the market to break positively as the market shifts from vaccine euphoria to IPO and M&A mania as profits from recent stock market gains will send mega-caps on a takeover splurge.
Anyone who was trading in 1999 probably felt some nostalgia watching Airbnb go public last week. Of course, the IPO wave in the summer of 1999 was followed by a move from 3000 to 5000 in the NASDAQ, so it’s not like the IPO madness was a bearish signal! However, the early warning radars went off two months later when the IPOs started to flop, which crushed many a day trader.
But the real worries can begin when the Four Horseman come riding in with IPO stock in their saddlebags. The concern is that everything moves in hyper speed in 2020, and 2021 is unlikely to be any different. So, let the New Year countdown begin to yet another retail-driven call option buying splurge on the high-tech flyers.
I’m not sure how much of a hurdle the Feds will be – likely a pretty low one. by all accounts. And I think the quickest tell will be how the dollar reacts.
With the ECB and EU Council summit out of the way, the main tactical hurdle is the December 15-16 FOMC meeting. Most economists I have read expect the committee to announce an increase in its bond-buying program's weighted-average maturity to help keep rates low through the whole transition back to full employment. QE will have a negligible impact on FX as currency traders are more concerned about near-term rates, hence they’ll be more focused on the dot plots. Following the vaccine news, some members have turned less dovish.
That said, a broadly hawkish message from the central bank seems unlikely. The front on of the curve should stay neutral —in part because market inflation expectations are still low, and the FOMC has explicitly tied the rate hike decision to realized inflation.
With that in mind, as commodities rip higher, the market still likes the 50:50 dollar short in CAD and AUD. Traders have positioned for copper wire to encase the plant multiple times; indeed, to call this a strong base metals rally would be an understatement.
The single currency is echoing the global markets' overall risk aversion rather than any significant impact from the ECB meeting. The outcome of that meeting was as expected. The lack of an intensification of the currency rhetoric from what has gone before has kept a bid under the EURUSD, despite the pound at one point hitting the no-deal Brexit panic button and toppling below 1.320.
The expected monetary easing delivered and the lack of pushback around the EUR left the currency little changed, and it appears the market focus has already moved to the FOMC. With cyclical companies struggling in Europe's equity markets, it seems likely that Covid-19 fears have returned to the fore.
Traders might square up EURUSD shorts ahead of FOMCs as no one would want to stay long US dollars just in case the FOMC delivers a dovish message, which would open the door quickly for further dollar weakness in Q1 where even the most ardent euro bears will likely concede.
The Malaysian Ringgit
The Malaysian ringgit closed below 4.05 on Friday, as global vaccine optimism has ignited a fire under global commodity prices. And the BNM will likely be more accepting for currency strength than other regional central banks to encourage more capital inflows, suggesting the ringgit will continue with its catch-up play, supported by higher oil prices into 2021.
Last week was a significant inflection point for oil markets. Brent broke $50 for the first time since early March, reflecting continued momentum as the market was adjusting for this past weekend's FDA emergency vaccine approval and the demand recovery into 2021.
The oil markets are trading up this morning as the FDA approved the vaccine's emergency rollout, Brexit discussions endure which suggests no immediate global risk reset, and it appears vaccine supply constraints will be overcome quickly; a convoy of trucks is already making their way from Pfizer Kalamazoo headquarters to US hospitals. And the airline industry is also kicking in by offering idled planes as vaccine cargo haulers. This will all help assuage some of the market's growing laundry list of near-term economic worries.
There are definitive signs of a strong rebound in the eastern hemisphere, still worrying signs in Europe and the US could hamper year-end top-side ambitions. It seems likely that Covid-19 fears have returned to the fore; Germany, for example, reported its highest number of cases and deaths and is about to enter another lockdown. The closing of New York eateries, effective Monday, reinforces the growth worries and it’s starting to look a lot like Christmas-lite for holiday revelers in the US.
In early 2021, two supply responses will be key in determining the medium-term price: how OPEC+ reacts, where policy suggests that it should begin feeding its spare capacity back carefully but how quickly could be the question; and US shale producers, where the consensus is that producers remain on a tight capital leash, when history suggests they’re itching to get back to drilling.
1Q 21 could be challenging, with the outlook for demand still uncertain, but it looks increasingly likely that the second half of the year will see oil demand approaching normal levels. But that will not necessarily result in significantly higher prices as both OPEC+ spare capacity and all but forgotten shale could resume pumping at the improved break-even levels.
The market has been well supported on dips. Still, sellers line up as we near Brent $51, perhaps banking on year-end volatility as the JMMC becomes increasingly in the market's focus where oil price support may hinge on an OPEC+ decision whether or not to open up oil spigots a bit more freely.
And while I still worry that the sharp rebound in oil in recent weeks is pricing in a level of optimism that may not withstand any mixed news on the vaccine and the global economy, whatever my concerns about the near-term outlook the future looks a lot brighter for the oil markets than it did only a month ago.
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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