Yesterday we concluded that the fall in the VIX provided a beacon for clear sailing. But things proved to be more than that as the fall in the VIX has triggered the reflation trade to “all systems go” which was then boosted on stimulus rocket fuel mode.
The tides of US stimulus rising all boats is providing the significant risk-on accelerant.
Optimism over the colossal US stimulus deal fuses at a critical point when US COVID crisis management regimen turns the corner on a positive note providing market boosters with excess rocket fuel to burn.
There are four powerful “macros” supporting markets this week: US vaccine progress, the Reserve Bank of Australia (RBA) easing, Fed communication and US government spending.
Together, they remind investors that economic conditions will improve.
With central banks continuing to cover investors who are now pivoting to improving macro developments when supported by oodles of monetary policy, risk can remain at lofty levels if the macro backdrop remains supported.
And we won’t need to wait too long to prove that thesis as tonight’s non-farm payrolls (NFP) should provide the suitable sounding board.
Colossal progress continues to be made on the US vaccination front where more people are vaccinated (or at least had one-shot) than have tested positive for Covid-19 since the pandemic began.
Since vaccination progress hasn’t come close to reaching its apex yet, there remains a long runway for vaccine catalyst price evolution through the end of 2021. As consensus as that trade may already be, it is difficult for prices to have fully reflected it all this far in advance.
On the main, US equity markets continue their grind higher as volatility normalise and focus shifts back to earnings and macro drivers such as reopening and stimulus.
Similar to yesterday, the reopen trade outperforms with banks and airlines leading. Mega-cap tech is more mixed today with small and mid-sized growth exceeding as folk move out the risk curve on the tech side.
But a truly good outcome on the stimulus front is that if it benefits all especially in heavily hit segments of the country where one in six can’t make rent, and one in four small businesses that are closing permanently or have already shuttered.
It’s Friday, and I’m just not sure how much gas I left in the can to keep this thing going, but the reopening path looks gleaming with new Covid-19 cases in the US slowing; vaccine rollouts accelerating and with investors now repricing in the upside risks to the markets US fiscal stimulus assumptions – all the ingredients for a rapid recovery from Q2 onwards will lead to El Dorado.
PBoC withdraws liquidity
And just as people were starting to get used to the idea that the People’s Bank of China (PBoC) – with the economy weakened by the pandemic and heading into the Chinese New Year – would keep liquidity flush, it withdrew it – and this, just as end-of-month demand for it picked up.
This change of tune came against a backdrop of concern that asset bubbles – inflated by plentiful liquidity – were forming. Market rates soared, leaving many investors guessing the PBoC’s policy intention amid mixed signals.
Oil continues to rally
There was a nice V-looking chart for WTI today with the commodity hit on the release of the EIA’s Annual Energy Outlook 2021 (projecting it will take years to get back to 2019 levels of US energy consumption), only to quickly bounce back.
Oil spent much of New York session above WTI US%56 a barrel, extending gains from Wednesday when OPEC+ maintained oil output cuts. As optimism over a much-discussed US stimulus package also proved supportive.
Rounding out the positive scrim and pushing back on any thought that China demand could dampen as prices shift higher, industry trackers reported that two Very Large Crude Carriers (VLCC) are heading to China for March 22 March 24 delivery of North Sea oil, which confirms that real demand is driving the front end of the curve.
When demand drives commodity prices, it has a more bullish impact and leaves a more lasting reflection on price action.
The full OPEC+ ministerial meeting in early March could be more difficult because production increases will likely be on the table, especially if oil prices continue to trend up.
Until then, the aggregate group shows cd commitment to do whatever is necessary to support; the outlook is rosy.
Equity and Oil market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi