After the market skimmed off the worst-case scenario bets embedded into spot and term structures due to the Texas storm price effect, oil prices bounced after a slight downside overshoot. Given the ongoing evidence of recovery in global demand, mostly good news on the COVID-19 trends and robust economic data allowing oil investors to turn their attention to updates on reopening timelines—oil remains bid on deeper dips. As at the end of the day, another large fall in crude stocks provided all you need to know from the fundamental perspective.
Still US rates market and early pre-OPEC meeting position squaring could provide some headwinds.
The new market paradigm
The market dynamics seem to be shifting as stocks become more negatively sensitive to higher yields. Still, the reflation trade endures, albeit on a more tenuous tangent, as the market becomes increasingly concerned that higher yields via the real inflation impulse may ultimately force the Feds hand.
Indeed, the larger scale stimulus amid a recovery from the COVID shock has investors focusing on potential impacts from rising rates and inflation, providing a pinching point for stock markets. It is starting to look like a rocky road ahead.
Equity rotation is much less pronounced today, but it has all the hallmarks, low volume amid directionless trading, of pivoting to risk-off. But it is expiry later today, which will naturally bring some pre-position squaring.
Forex has devolved into a 24-48 hour trade as I don’t think there is an easy path with global breakevens driven by a surge in the inflation risk premium component all moving to the same beat. The increase reflects a dissipation of perceived downside risk to the inflation outlook amid a broad-based improvement in global economic prospects, massive fiscal stimulus and widespread monetary easing.
With commodity prices looking like they could top out, I think its time to reduce some commodity currency linkers. Higher US interest rates could very well throw a damp squib on the reflation trade, so there is naturally less top side speculation for commodities and that the frothy top may get blown off, and , and could follow suit.
NOK price action underwhelming this week; I think the risk of a correction is rising right across the commodity spectrum, with the oil anchor looking a bit fragile ahead of the OPEC meeting.