Asia Market: The Macro Dilemma

Market Analysis / 7 Min Read
Stephen Innes / 01 Feb 2021

Market highlights 

  • Nimbleness required as risk markets could spin like a top this week
  • Despite a 1Q slowdown, 2021 is set to register the most vigorous global growth explosion in decades
  • Samurai-styled bandana-wearing social media influencers
  • Backdrop for oil remains worrying

Markets

US equities were weaker Friday with the S&P closing 1.9% lower and similar declines through Europe. The VIX rose almost 3pts as irregular and predatory trading continued to affect a handful of stocks targeted by retail investors. The SEC on Friday issued a statement committing to reviewing recent activity. US10y yields were up 2bps to 1.07%.

Last week’s wallstreetbets-inspired short squeeze frenzy in US single stocks and subsequent deleveraging across global markets provided a not-so-subtle reminder that social media hasn’t lost its market influencing power, even with former President Trump banned from Twitter.

It's incredible how many times this past year we issued a cautionary tale suggesting stocks are entering a tricky period only to see equities at the index level race another 100 points higher during the ensuing 72-hour period. Maybe it took peak New Year exuberance and hate towards the status quo meshing with absolute frustration about the current lockdown situation to trigger what might become known at Occupy Wall Street 2.

I caution here that it’s imperative to stay nimble as risk markets could spin like a top this week.

The Macro Dilemma

Despite lockdown and mobility restrictions tightening and leading to a 1Q slowdown, in 2021 the global economy will register the most vigorous global growth explosion in decades. And when combined with the continued policy support, it should ultimately outweigh any risk parity driven sell-off in stocks.

Even with some vaccine distribution issues amid logistical constraints, vaccine rollouts will ultimately be the linchpin for the global recovery.

But, teething pains aside, optimism took another setback after Israel – which is viewed as the poster child for its speedy and efficient vaccination rollout protocol – extended lockdowns until Friday as coronavirus variants offset its vaccination drive. Officials are predicting a delay in a turnaround from the health and economic crisis.

Indeed, there’s a growing conviction, due to the new highly contagious and apparently vaccine impervious strains, that easing lockdown restrictions must happen at a very gradual pace to read the actual results that the vaccines are having on the ground. And the more protracted the lockdowns, the more chance for parts of the global economy to fall into a double-dip recession, whitewashing over any hope for an immediate return to a globally synchronized economic lift-off.

Samurai Styled Bandana Wearing Social Media Influencers

Curiously, this revolt then gave rise to Samurai-styled bandana-wearing social media influencers, backed with a relatively brilliant options market strategy and insider short position knowledge to knock the market of its positive risk axis. In my 25 years as a "market maker", acquiring accurate "short position" data was next to impossible. In fact, what is available to the general public and devising a strategy around makes polling data look flawless by way of comparison.

VaR-related risk reduction usually happens quickly and ends fast as the reasons for the disruption get disseminated; the barometers used to measure risk across the financial industry then respond favourably in kind. But it doesn't lessen the agonizing experience to be on the wrong end of the stick when so many stops are triggered, and consensus positions get cut around the same time.

So far this is an equity positioning drama, not an economic one, so there’s no spill-over into other asset class. Here, understanding market structure is critical. Not having a single risk multi-asset risk on view is vital; the focus seems to be drifting from crowded institutional shorts to crowded longs.

Now, predictably, more influencer types are piling on and tweeting about impending risk party washout although that reasoning is rarely confirmed and so overused for convenience. The scramble for after-the-fact rationalizations continues fueling the de-risking fires, making stock trading at the index level a very tricky proposition indeed.  

Oil Markets

WTI and Brent were trading up on Friday as prices were planked by significant inventory decreases and a slightly weaker US dollar. The dollar is trading a bit stronger today so the currency impulse is weighing slightly on oil prices out of the gates.

Still, the backdrop for oil remains worrying as even with the vaccine rollouts due to the new and more vaccine impervious strains, and there’s a growing conviction that easing of lockdown restriction must happen at a very gradual pace to read the actual results that the vaccines are having on the ground.

Fortunately – and predictably – oil prices are showing next to 0 betas to Wall Street‘s single stock kerfuffle.

And after downgrading 1Q21 demand two weeks ago due to extended lookdowns in Europe then unilaterally but counter-seasonally cutting Chinese oil demand last week as the country's lockdowns spread just weeks ahead Lunar New Year travel rush, it's not the best of bullish lift-off environment for the oil market.

Perhaps with the dark days of winter now gloomily priced in, the market will pivot to supply and vaccine rollout data.

The street’s attention should switch favourably to supply this week with the JMMC on tap. Iraq announced plans to abide by the principle of compensation to exceed its OPEC+ output quota in 2020. Supply is tightening further with Russia planning to cut its Urals crude exports by almost 20% to a three-month low in February, as oil gets diverted for domestic consumption due to frigid weather. Somewhat offsetting this, Iran's exports look set to increase this month.

But the majority of supply-side focus came from the US. On Wednesday January 27 the Biden administration announced a pause on new oil and gas leases on federal lands and waters while a "rigorous review" occurs; that’s bad for oil stocks but good for oil prices.

But before things worsen on the Biden administration meets green energy meets US shale confluence, Baker Hughes reported that oil rig counts increased, perhaps signalling a willingness to take advantage of current price amid the struggling oil outlook.

Currency Markets

Single-name equity drama has very limited direct read-through to FX. Still, the rise in equity volatility has prompted FX to reprice the growing tension in the global macro outlook between a brilliant 2H recovery outlook and near-term risks around the virus and vaccine rollouts.

The growth differential and expected timing of growth impacts between the Eurozone and the US lends itself to trading short Euro.

Onshore China trading volumes are shrinking ahead of the CNY holiday. Still, the PBOC injected liquidity to sure up sentiment ahead of the break after several weeks of draining liquidity had increased nerves. For instance, last Friday, it was hard to tell how much CNH buying was driven by funding necessity; no one wants to get caught short Yuan into a lengthy holiday roll or if it was through to a medium-term synchronized recovery in global growth as vaccine distribution jams get ironed out.

We also started to see a repricing in capital cost, although the Fed is making the best effort to water that down globally. Still, the PBoC has been sending out rate hike trial balloons that, at the worldwide level and outside of a few position reductions in crowded reflation trades, is being ignored. Still, the potential policy tremors resulted in some investor jitters last week.

I expect the current ranges on the Ringgit to hold as medium-term global optimism gets watered down by the likely 1Q economic beatdown via the commodity and oil channels.

Afterthoughts

It wasn't easy to short at the index level due to the duel policy puts, and the vaccine rolls out the narrative. With predatory short selling sharks on Wall Street whacked by many savvy kids trading a bit of daddy's account and turning some of their own pizza delivery pocket money into six figures, the frenzy will soon come to an end. But I don't think we’ve spawned a new generating of super traders, because we all know this is eventually going to end in tears for the greedy.

I would like to see who was fronting and/or frontrunning this GameStop fiasco; the data is there so should be evident for all to see. The options analysis is too sharp and, from day one, I said it had the smell of a disgruntled Wall Street derivative trader insider. But with so many good ones running their own "home office", it’s a case of pick a name out of a hat, get a flash mob, add in a "get shorty" tweet from Elon and… kaboom.

For more market insights, follow me on Twitter: @Steveinnes123 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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