Asia Wrap: Robust Risk-On Tone

There’s a robust risk-on tone in markets today. The driver is not immediately apparent, but I suspect it has to do with the quick end to former US President Donald Trump’s impeachment on Saturday.

The surprise was that the Democrats decided not to call witnesses, which could have dragged things out possibly for weeks. The reason for the decision appears to be that the Democrats want to entirely focus on the proposed fiscal stimulus package and not be distracted by the impeachment process, which was never likely to result in a guilty verdict anyway.

So, I think the market reaction is correct: the probability of a large and swift fiscal package by mid-March has just gone up substantially.

The European market is trading higher taking cues from Asia, with and outperforming on the back of stronger macro data. Volumes are muted with the holidays in China and the US. Broader macro indicators continue to point to risk on

Stocks continue to trade at all-time highs, and volatility keeps falling. The was just below 20 as President Joseph Biden rallied support among mayors and governors for his $1.9 trillion stimulus package. At the same time, Treasury Secretary Janet Yellen told the G-7 that its time go big on fiscal aid. 

Forex

Emerging market FX looks buoyant today with the softer backdrop. The usual suspect’s and are leading the movement. But even is below 7.00 for the first time in the past six months, so you know the chase for yield is on full bore. All thanks to dovish FED and investors insatiable appetite for yield.  

In G-10 so far it been a day for dollar bears as risk continues to trade supported with US stimulus in the air, a series of upside surprises in 4Q20 economic developments and positive news on vaccinations driving the action. But higher US yields may temper the G-10 chase higher. 

Fire and ice push oil prices

The omnipresent smouldering Middle East powder keg provides the fire, and a cold snap in the US offers the ice to push prices. Mind you neither Mother Nature nor Middle East tensions amid a supply glut will have the legs to support oil prices alone, as both types of bounces typically fade as quickly as they come on.

Stimulus bazookas continues to drive global equity markets.

Asian markets have started the week on the front foot with the Nikkei (+1.78%), KOSPI (+1.76%), India’s (+0.92%) and (+0.91%) all posting gains. The Nikkei is trading above the 30,000 marks for the first time since 1990 and is catching a tailwind for Japan’s Q4 as stimulus bazookas continue to offer up 21-gun salutes to global equity markets.

Oil prices climbed in Asia as the Texas oil operators warned of “freeze-ins” due to artic vortex type conditions that could reduce Permian Basin oil flow to a trickle.

remains well offered given the backdrop of higher US yields amid tepid realized US inflation.

The US dollar continued to drift lower on a continuation of last weeks theme after disappointing US and prints alongside dovish comments from Fed members weighted down US dollar sentiment. 

Inflation is getting discussed in some form or another at virtually every market corner and trading desk meetings.

Inflation is one of the most important economic variables that trickles through nearly everything. That makes understanding what is happening exceedingly important.

With everyone talking about inflation and as market-based “inflation breakevens” snap back above pre-COVID readings despite the sticky US CPI reading holds the reflation bus up, it has likely triggered a lot of variable reprogramming at the systematic level and certainly a lot of confusion among investors and jr analysts alike. 

Given the stimulus deluge and soaring oil prices, higher breakevens (implied inflation) make sense, but the run-up in the breakeven also carries a bit of a warning. The deviation between breakevens (implied) and realized inflation is extreme. Typically, this dynamic indicates out of touch inflation expectations, but it is COVID recovery, and nothing happens as it should.

Still, it leaves us with one obvious takeaway. If inflation does surge with the intensity of some market-based readings, the anticipation for the first Fed rate hike will need to shift sooner than currently anticipated.

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