VOTING WITH THE BUY BUTTON
The positive swing in investor sentiment ahead of inauguration day is a clear signal the market is leaning towards an early stamp of approval on the Biden administration policy agenda as global investors continue to vote with their buy button.
NO HONG KONG PHOEY
None the more evident than which are experiencing a running of the bulls today. Local investors set sights on the psychologically critical 30,000 level, as mainland investors continue to make lemonade out of lemons before foreign investors warm up to the idea who tend to like the Hong Kong proxy as a more accessible version of China markets.
This unbridled stampede looks like a mad dash of Chinese investors hoovering up elephantine block trades as demand for China /HK stocks could reach epic proportions as global geopolitical risk eases with a much more tempered and thoughtful leadership at the helm of America’s policy aircraft carriers.
continues to struggle as the markets apparently can’t shake off the COVID jitters in the face of the slow vaccine rollouts and will likely need some of that acceptable old ” proof is in the policy pudding” concerning the US vaccine rollout plans.
But not to poke holes in yesterday’s as far as oil is concerned. China’s economic recovery continues at a healthy clip but suggests that consumers are lagging producers. This dynamic hints at a patchy global consumer recovery to come, not great for gasoline demand at the pump per se. Hence the reason why oil didn’t react anywhere near the same extent as industrial commodities.
Many US markets were closed for Martin Luther King Day yesterday. However, futures were still trading. But it’s been a relatively sluggish start to the week as one can imagine and the lack of activity on the big-ticket market items like US bonds and stocks make it challenging to get a good read on investor sentiment. But overall, even with this morning’s enthusiasm in Asia, it is this seemingly never-ending pandemic threat that continues to loom.
However, any hints of risk aversion dotting the market scrim have been little more than taking profit from winners—any weakness has not been much more than that. The dual policy puts from monetary and fiscal policy succour, and the vaccine rollout, as logistically challenging that looks to be, still points to gleaming days ahead.
It is hard not to like the sound of the Biden administration’s overarching focus on public health and economic responses to the COVID-19 pandemic. A crucial part will involve distributing vaccines to hundreds of millions during the administrations’ first year. Indeed its should be the Biden administration rollout policy of vaccinations, not the timing of taxations that should continue to resonate with investors.
But notably, even as the coronavirus runs amok, this positive policy elixir provides a resounding backstop tempering volatility sensitive strategies while always keeping investors safely away from re-entering the pandemic doom loop.
Democrats will control Washington’s policy agenda over the next two years. Hence, investors continued to bounce Biden’s pro-growth policy against the significant pick in federal spending in response to the COVID-19 pandemic. Most discussions revolve around who will pay for it after President-elect Joe Biden mentioned last week that everyone would pay their fair share for the stimulus package, bringing the focus back onto taxes when the market has been pretty comfortable assuming they won’t come until late 2021 or early 2022.
Still, Democrats may need to push back specific COVID-19 spending priorities that don’t get sufficient Republican support—like direct support for state and local governments—to a reconciliation measure that only needs majority approval in the Senate.
Democrats will chip away parts of the 2017 Trump tax cuts. And while the extensive scale tax rewrite is coming, the market is uncertain over the timing. But its suspected Democrats will use the reconciliation process to make targeted tax reforms. This package’s cornerstone is likely to be higher corporate tax rates and higher income tax rates for wealthier Americans.
But at the end of the day, even with majorities in both Congress chambers, Democrats will have difficulty advancing a bold, progressive policy agenda due to a razor-thin narrow majority. And its likely policy uncertainty creates a high level of discord and could lead to market disharmony periods.
In a typical case of coronavirus induced fears spreading across global markets almost predictably oil prices are off from last week as sentiment cooled with swelling production inventories then fused with the return of COVID in China, providing a not-so-rosy near-term demand signal.
And adding to the slippery drift to the downside flow is the slow rollout of vaccines globally which are walking back the timeline for jet fuel demand to take off.
The shift lower in oil prices is a technical correction to a large degree as it is a COVID driven sentiment sell-off. And while oil market risk appetite can remain at high levels for extended periods as long as the macro environment remains supportive. The US data has been less encouraging lately; however, yesterday’ Q4 China GDP data provided a festive reminder that China’s economy continues to fire on all cylinders and brought with it dip-buying support.
Overall, the policy mixes between OPEC+ current supply discipline coalescing with the Biden’s administration’s overarching focus on public health and economic responses to the COVID-19 pandemic, suggest oil prices can go much higher.
Still the current, headwinds from a stronger USD and evidence that the coronavirus continues to spread are clouding the demand outlook. It should come as no surprise that Q1 2021 continues to reflect a complex and uncertain demand environment for oil, and the strong rally for oil into year-end 2020 and in the first week of 2021 has left the price-sensitive to profit-taking. I expect oil to stabilize near the current level, as progress is made on the coronavirus vaccine rollout. ASs we move closer on the path to a typical demand environment, oil prices will then soar.
With the Biden inauguration stealing the limelight this week, traders are still a tad concerned about a foreign policy pivot. One of the wild cards for oil this year is the upside to Iranian production (dependent on the potential lifting of US sanctions under incoming President Biden)
We have already seen hints of the Democrat pro-green policy agenda on reports that the incoming Biden administration will cancel the Keystone XL pipeline by executive order is a reminder that US oil and investment could face new and more significant regulatory and policy headwind.
The signs the upswing is about to pause as significant technical support/resistance levels continue to hold, especially as risk sentiment stabilizes lessening the demand for “safe-haven” dollars, albeit with e-mini’s a touch lower.
The BTP market was relatively calm ahead of the government’s confidence vote in the Italian Senate. Justifiably so as Italian Prime Minister Giuseppe Conte won a crucial confidence vote in the Chamber of Deputies on Monday, hanging on to power after a junior partner quit his coalition last week.
Despite the recent USD correction, should remain supported by a robust European recovery and a large fiscal stimulus package in the US. Fed Chair Powell’s assessment last week was dovish and caused a push back in Fed taper expectations to September for December. And with buying into that narrative coupled with the recent unwinding of cash and option longs and fresh downside buying, it has led to a sell-off in risk reversals. It offers a pretty good opportunity to buy discounted EUR calls, and that buy-in seems to be holding the EURUSD above the critical 1.2064 level on close.
Still, FX seems set for an extended first-quarter lull if not the graveyard as the EURUSD hashes out new ranges. The US yields ran out of steam ahead of 1.2% and have consolidated around 10bp lower, leaving short dollar sentiment bruised but not broken.
The immediate future for FX markets is about as ” spaghetti at the wall” unclear on several fronts. Still, the next USD leg lower should restart in the second quarter when the taper dust settles, oil price move higher and reflation trade soars.
With both the upward trend in US yields and the USD pausing, gold has been able to hash out a comfortable base above $1820 as last week dovish comments from Chair Powell continue to resonate.
What I’m looking at today
Frankly way too much and like most other analysts/trader and investors regarding any political regime shift what policy is good and bad for the investment climate. But with such a big agenda rewrite, market could be stuck in the revolving carousel of US political risk analyzing Democrats’ victories in Georgia, COVID-19 efforts and stimulus, Democrat targeted tax reforms, infrastructure, Biden appointees, healthcare, debt/deficit issues, regulatory review, climate/green energy, immigration, China, international relations, Big Tech, financial services and other matters.
Yes, the laundry list is vast, and we could find ourselves tied in political knots for some time. Democrats will have a hard time advancing a bold, progressive policy agenda with constant Republican push-back as it is unlikely the GOP will make these next two year a policy walk in the park.