The markets appear to have entered a period of consolidation. But for the reason why, it seems easier to paint a speculative cause and effect to fit the narrative: be it the collective US political insanity during Trump’s final days to soaring US bond yields and the uncertainty if the US Federal Reserve is going to push back.

However, the truth lies somewhere in the middle.

And it’s hardly surprising why investors are a little confused when the narrative morphs in 24 hours from stimulus “float all boats” to the ebb and flow of those very same tidal waves having overcooked the markets triggering the Roche limiter.

All of which sees risk sentiment entering the early-stage process of fragmentation.

However, any time you get a quick fixed-income move in either direction, especially one that challenges a one-sided bullish view, the market narrative naturally takes a pause.

And while the structural catalysts of vaccine distribution and activity normalization remain intact. Still, we are now potentially approaching the last stage of fiscal stimulus, and the Fed is on a path to tapering the pace of asset purchases.

Whether one wants to discuss the epidemic or the Beltway situation, there’s light at the end of the tunnel. The problem is that, for now, the green light has temporary given way to a state of investors political angst.

Still, fortunately, the promise of brighter days ahead on the back of the three-pronged puts of vaccination, fiscal and monetary policy backstops make it difficult for equities to a selloff in a determined fashion.

But investors have found themselves sitting under one of the darkest clouds of political apprehension ever that is now hanging over Donald Trump’s final days with “The Street” growing more stressed by the hour about the prospect of more violence.

On Monday, the FBI warned that armed protests are planned at all 50 state capitals and in Washington ahead of Joe Biden’s inauguration.

People worldwide are tired and frustrated by lockdowns, and the real fear here is that anarchy on the street of the US could spread across the planet as quickly as this new variant.

Let’s hope I’m wrong, but near-term equity direction is likely to be choppy held hostage to this very same political angst.

Hopefully, by next week cooler heads have prevailed and after a period of digestion, the bull case for the market still looks compelling through any lens. But instead of running the clock out on Trump, the Democrats and some Republicans are invoking a policy that might not only politically backfire. Still, they could trigger more anarchy in the streets.

The risk for markets around President Trump’s impeachment is not necessarily the outcome, as it is unlikely the Senate will reach the 2/3 majority to convict, but the timeline and how it pushes back the discussion around additional fiscal stimulus. Now for above water market concerns that seem to be where the balance of risks lies.

Rising Covid cases and more lockdowns

Of course, the rising COVID case counts and the never-ending lockdown loop the world have found themselves back in again remains a constant blight stain, but that also could be part of the problem as political unrest grows worldwide as average Joes are fed up with the so-called East Coast -West Coast “elitist agenda” and the power of social media to rewrite the laws of free speech at will.

You have 100 million folks in the US that aren’t happy. That rebellious army is growing worldwide as people try to rationalize their leaders’ response to what some are unwisely calling The Duck Dynasty invasion of Capitol hill.

Still, a huge disconnect is growing around why their political leaders didn’t stand up to China over the Hong Kong affair.

Oil pulls back as Covid-19 cases rise

Covid resurgence, a stronger dollar, fed policy uncertainty and political angst are all combining into a near term toxic elixir for oil markets as traders are unwilling to fire higher this week so far. This, despite the structural catalysts of vaccine distribution and activity normalization remaining well intact.

Still, the modest pullback in price is very unsurprising after such a strong first week on the year, reacting to the surprise unilateral cut in Saudi production and the prospect of increased economic stimulus in the US as the Democrats won control of the Senate.

Friday’s Baker Hughes rig count saw a rise again. Still, nothing too excessive – US mobility activity, especially now with the possibility of an extended period of anarchy in the streets, remains a major risk to the medium term’s oil market recovery’s stability.

Folks are scared to leave home due to the Covid scare, but after the FBI warned that armed protests are planned at all 50 state capitals and in Washington ahead of Joe Biden’s inauguration, no one wants to go out.

An outbreak of Covid cases in Hebei province in China with the country recording its highest total of new cases for five months will be observed as Asia. In particular, China has been the driver of physical demand recovery in oil markets.

The other problem flying under the radar is a worrisome theme that could negatively impact sentiment. And in the case of a few bad apples ruining the whole bunch, because the current lockdowns were not being observed, further lengthier restrictions might be needed.

I think the street views this toxic elixir as a near-term speed bump and not necessarily great reasons to go short contract at this stage.

US dollar stronger

The US dollar is stronger this morning with the “risk-off” mood likely the driver while the clouds of US Fed policy taper uncertainty continue to hang over currency markets.

It’s difficult to figure out what’s important for FX market right now, especially after spending six months under the blob of reflation and USD debasement story exclusively. Suddenly, there seems to so many more moving parts.

Euro under pressure as US dollar gains

For months EUR was able to capitalize on USD disdain despite its fragility, the EUR is now proving vulnerable to the USD’s stronger start to 2021.

Pound fails to lift after Brexit

And with Pound failing to lift off on Brexit due to the new virus variant, I believe that the UK’s negative interest rates would be a big enough domestic story to impact GBP. So, mark February 4 on your calendar as the market goes through the procession of reducing long GBP exposure as we get closer to the Bank of England (BoE) rates decision.

Ringgit faces triple whammy

The Ringgit is suffering from a triple whammy of negativity. Oil prices remain tentative. The US dollar gets stronger across the board on rising US yields, and the Malaysia governments tighten MCO restrictions in yet another setback to the struggling domestic economic recovery. And all this adds up to the sound of retreat for the Ringgit.

Published by Stephen Innes, Chief Global Market Strategist at Axi