After a year of being in fight-or-flight mode, there is an increasing sense of COVID-19 fatigue in the face of the mutant virus that is hitting equity markets this week.

Not surprisingly, this is getting compounded by year-end position squaring was preservation of capital trumps risk-taking proclivities. I mean, how many times are we going to backtrack to the edge of the COVID-19 lockdown abyss before falling in again, bullish positions and all?

The agreed fiscal relief package will assuage holiday concerns on Main Street and fortunately provide those most in need with a Xmas stocking stuffer check. However, the market’s blasé reaction to the second-largest fiscal stimulus agreement ever clearly suggests that mutant COVID-19, Brexit and the Georgia Senate runoff are on everyone’s mind.

Besides the obvious market sentiment shifts on the most worrying virus mutation, some dim-lit economic worries could still hurt the reflation trade in Q1. Even with the vaccine rollout getting underway, people had become polarized into one of two groups — those ready to travel now and those who are not prepared for six months or more.

With the new variant of the virus unleashing its wrath on the UK, it is not a stretch to assume that the percentage of those ready to travel anytime soon will drop. Undoubtedly this could be a huge setback to the travel and leisure sectors and hurt currencies like the THB, where the economy is totally dependent on foreign tourists.

But this is a market far from being bathed in abject defeat as the vaccine narrative has such a long runway for catalyst evolution through the end of 2021. It is difficult for prices to have, as consensus as it may be, to fully reflected all this far in advance.

Oil drops

And rubbing salt in the oil market wounds today, oil prices lurched lower, after yet another inventory build that was very much bearish to a consensus to what was pencilled in by analysts.

Oil traded lower again overnight with worries over the new virus variant and restricted mobility in most of Europe as demand fear resurfaces travel restrictions. And to assume this could be an isolated UK event might be unwise.

The politicians that were tardy to impose lockdown restrictions back in March might feel politically pressured to reimpose even stricter measures. If the US goes back anywhere near the edge of the Covid-19 lockdown abyss, it could be lights out for the oil rally for at least another 4-8 weeks, not to mention a big price wipe-out.

Unfortunately, for energy bulls, crude oil is the favoured downside pawn often in play when lockdown headlines hit, and the heavily skewed long to short bullish positions give the contrarians a target to throw darts at.

But it is becoming increasingly likely that we will see extended and severe lockdowns for most Q1. That is not necessarily priced in. Considering that, even with a risk-on leg on a positive Brexit deal, a turnaround could be followed by more intense lockdowns, which wash out more of the November oil price rally.

And while the blockade at British ports continues. Worryingly for Asia concerns where the recent backbone of oil demand has been coming from, Taiwan announced a locally transmitted case – stress on the ‘locally transmitted’ part – the first case in eight months.

The new obstacle in the road to oil price nirvana is that Russia favours a second 500kbd OPEC+ production increase in February has weighed also.

I see this as expected – OPEC+ needs to ensure its production capacity meets demand rather than have shale fill in the gap. However, if we reach a price and demand point where it makes sense for OPEC to raise production, it might not be viewed as bearish at all. Hence, I think production decisions are guided by price, so I think we should tell that front.

Forex markets

EURUSD topside has been one of the positions that the market has been more than happy to add on dips. With the risk-off moves triggered on manic Monday, some interest the other way is starting up. After a US stimulus inspired higher, EURUSD virtually collapsed under the weight of intense selling pressure when the rally failed at 1.2250.

But with the pace of Eurozone equity inflow ebbing, the EUR is losing one of its main anchors suggesting the current length looks stretched considering slower inflows. And with the EUR vol curve slightly inverted, like elsewhere in the G10, reflecting some elevated near-term risks such as Brexit and the Georgia Senate runoff, we could see better sellers on EUR rallies to clear out excess longs into year-end,

With Dollar Asia wearing the yellow jersey in the peloton to the year-end currency finishing line, the sudden surge in safe-haven US dollar demand has made that final steep climb to the end a gruelling one.

Many are admitting defeat as the latest mutant virus scare has caused severe cramping in the FX world, which is getting compounded by year-end position squaring to avoid paying the year-end turn piper. Indeed, FX markets become extremely transactional at this time of year.

The Ringgit in aggressive catch-up mode has fallen back in the pack, getting more influenced by oil market swings than anything domestically. But the drop in overall equity market volumes will hurt all risky assets through the ” risk on risk off ” feedback loop.

Gold caught up in year-end squaring

Gold is getting caught up in the year-end position squaring vortex as bullion banks trim balance sheets into the year-end turn. This is getting compounded by a walk back in the reflation trade narrative as viewed through the lens of a stronger US dollar into year-end.

International market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi