US equities recovered Thursday, with the S&P up into the close but quickly tacking south as e-minis continue to wobble.
While US equities were highly volatile, US Treasury yields were pretty calm. In the main, the bond market could see that equity losses weren't 'macro' in nature, which has likely helped stocks stabilize after systematic and mechanical risk reduction programs knocked equity markets off there positive bias when the hunted (retail traders) turned hunters.
But caution reigns as there’s still evidence of unwinding in US equities on the hedge fund side, even with some "buying the dip" kicking in to take advantage of recent dislocations.
Apple and Facebook are failing to run on good numbers, suggesting that typical investors are still struggling to get back in the saddle and might only become inclined to put new money to work when there’s clear evidence of vaccine rollouts accelerating over the next few weeks. But even without Apple and Facebook, tech as a whole is recovering. Software and semis are both well in the green, while the hardware is more mixed.
The mood has become quite gloomy on vaccinations, which may not be surprising given we are in the pandemic's darkest time so far. But I think it's important not to lose sight of what matters from a medical perspective, which is that the vaccines work.
Still, fortunately, the promise of brighter days ahead on the back of the three-pronged policy puts of improved vaccination distribution, fiscal and monetary policy backstops will eventually win out.
Even if you missed upswing in the Aussie or bounce back in S&P 500, don't fret as there’s lots of time for more catch up trades next week. I think it’s best to be very cautious into the weekend as retail gains could trigger more hedge fund pain; with China tightening, it bleeds through all Asia-sensitive risk assets.
What is important is the longer-term view has not been whitewashed by the recent VAR styled meltdown. While Recent Covid-19 news and snail-paced vaccine rollouts are frightfully discouraging, the big picture doesn’t change in terms of markets outlook. Namely, that’s an unprecedented amount of monetary and fiscal stimulus, a structural shift towards much more spending, a potentially unmatched economic rebound – whether starting in Q2 or Q3 – and a reasonable chance of inflation for the first time in several decades.
And cross-asset markets with risk beta currencies are looking more normal today (I hope you bought that .76 dip on yesterday) so there are nascent signs of "risk-on". That mix is probably as constructive as one can ask for considering this week’s big market blow-off top.
A slight miss on US Q4 GDP, up 4%qoq saar, but a beat on the core PCE price index, rising 1.4%qoq against an expected 1.2%qoq gain. Though it's difficult to draw a firm conclusion, it might support a call for an above-market read on the monthly PCE deflator for December, due tonight.
As we move back into the "look through" trade environment, supported by monetary and fiscal puts, investors are quickly rediscovering that not all growth assets are created equal in a Covid downtrodden economic climate, and the forever fickle FX market is testament to the thesis that nothing goes up in a straight line. And this view provides a nice segue into my oil market note.
The mood remains downbeat on vaccinations.
After opening weaker on the day, oil rallied with other markets as the dollar weakened only to erase all gains and more as traders turn skittish about taking oil prices to the next level higher, even despite bullish signals from crude inventory declines.
Near-term fundamental headwinds continue to provide the ultimate rally capper. Chinese road and air travel mobility data are declining sharply into the Chinese New Year holiday, due to travel restrictions and a spike in coronavirus infections. Simultaneously, oil investors worries are coalescing around vacancies availability and rollouts, which could lead to protracted lockdowns in Europe which are likely the two most damaging feedback loop culprits on the continually revolving carousel of adverse risks for the oil market.
The list of national, regional and municipal governments is potentially more problematic, from not ensuring the logistical channels to both access and distribute vaccine is a growing problem.
A shortage of Covid-19 vaccines has forced Paris and two other regions that together account for a third of the French population to postpone giving out first doses, a source familiar with the discussion, and health officials, said on Thursday, according to Reuters reports. This follows similar steps from Madrid yesterday as the vaccine program continues to suffer from slow rollout across the continent.
I'm not sure how much Friday, March 21 Brent expiry was influencing prices; it’s not unusual for the front-month to move quite dramatically heading into expiry.
With risk recovering, the higher risk beta currencies pared losses as traders cut back short AUD and CAD risk-off hedges. EURUSD and USDPY are both stable, meaning the DXY dollar index is also showing little drama.
The ECB's determination to leave the door open to an additional rate cut most likely has EUR considerations as its driver.
A sharp sell-off in iron ore prices is a worrisome development for commodity linkers, more so Latin America producers and their currencies. China tightening bleeds into Asia risk assets like iron ore.
Though weaker, GBP is not showing the kind of sensitivity to risk. The lack of drama in much of the FX market may reflect a view that equity market tribulations are stock-specific VAR-styled sell-offs in nature rather than a reflection of global risk themes that would carry significant bond or cross-asset leakage.
At times it's just hard to believe what you’re seeing on the screen in equity markets these days.
The MYR remains mired in range trading proclivities but trading with a negative slant due to weaker oil prices. While there’s not much to get excited about these days, that should change once the vaccine distribution rolls out and offers brighter days.
Technically, bulls and bears are on a level playing field as spot sits on the main; gold's next upside target is a close above $1,856 while support lies at $1,825. The Fed remains supportive for gold, though not price inspiring. And the biggest problem for gold is the market discussion remains on disinflation, not inflation.
And after running roughshod over Wall Street Hedge Funds, short sellers in a hunted turn hunter scenarios, without oil commodity short sellers as day traders are moving into commodities.
There have been many posts on social media yesterday about silver, suggesting the market is materially short; silver prices jumped as high as USD26.95 an ounce. The price action is remindful of that seen in equities whereby shorts are getting squeezed, with a lot of the squeeze seeming to be driven by retail traders; driven by low delta call option buying in the SLV ETF silver moved higher.
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With equity markets rising to fresh record highs in the United States and Europe, risk appetite is rising again