The President’s day holiday set the stage for a quiet US market.
But we could see US investors extend the long weekend festivities into the market where conditions remain singularly focused on the reflation impulses from policy deluges amid the rapidly improving reopening act with Covid-19 showing signs of slowly burning out over the past month or so.
While rapid vaccine uptake means consensus is aligned to a surge in economic activity and strong profit recovery.
But there is still plenty of wood to chop this week as the equity market’s strength, led by ongoing steep gains since last summer in tech stocks and the current rotation into value has led many to ask what is already in the price. And of course, is any of the inflation narrative real?
Keep an eye on retail sales data
Retail sales will be the marquee data point in the US this week. And it would be a considerable understatement to say there’s a concern in some corners about the US consumer.
The January jobs report suggested the services sector remains mired in a recessionary wet blanket. So, an upbeat US retail sales data could provide the all-encompassing “proof is in the pudding” investors need to take the next massive leap of faith.
In contrast, a miss could offer a nasty consolation prize to stocks. Suggesting investors could temporary defer back to the “wait and see.”
Yields are back to the top end of the recent range as are stocks, but we likely need confirmation of the large US fiscal package to break the range.
Also, traders will get a chance this Wednesday to parse the January US Federal Reserve minutes for information that probably isn’t there. That’s the great thing about FOMC verbal gymnastics — everyone hears what they want to hear.
Speedy vaccine roll-out
Encouragingly, progress on the vaccine rollout for the likes of Israel, UK and the US provides optimism over how quickly a reopening could happen. Building momentum behind President Biden’s fiscal stimulus package has also supported sentiment. Both factors suggest even greater upside earnings surprises.
The series of upside surprises in 4Q20 economic developments highlighted by another GDP beat, this time Japan’s Q4 accounts, rising 12.7%qoq annualized against the consensus at 10.1%. GDP is 98.9% of its pre-pandemic level, underpinned by a surprisingly strong capex comeback, although consumption remains weak.
But notably, the more robust run of global economic data provides keen evidence to investors that the financial data is starting to catch up with the markets’ lofty economic recovery expectations in Q2 and beyond.
With the US Fed and Biden administration policies perfectly aligned and after a week of consolidation it certainly feels like the path of least resistance remains higher, as calls grow more vocal for an increase in the pace of reopening and the positive implications that would have for some areas of the market.
Oil’s next recovery phase
Accelerated vaccine rollouts globally and a sharp reduction in COVID-19 infections in the US provide the backbone for oil markets next recovery phase. And the most likely scenario should see absolute demand lift-off starting in spring or early summer amid heightened market overshooting risks as calls grow more vocal for an increase in the pace of reopening across the USA.
This week extreme arctic type weather in much of the US has triggered rolling blackouts and pushed prices higher across the energy and electricity complex. Power prices surpassed the grid’s cap of USD9,000 per megawatt-hour on Monday in Texas. In addition to the oil production” freeze in” across the Permian Basin, natural gas supply has also seen cuts to power stations, and refineries in the Gulf of Mexico have been shut, pushing gasoline and heating oil prices higher.
While the omnipresent smouldering Middle East powder keg threatened to reignite after the Royal Saudi Air Force intercepted an explosive-laden drone en route to Saudi territory, heightened perceived geopolitical risk and contributed to some momentum.
Keeping in mind Mother Nature nor Middle East tension price boosts amid a supply glut is likely to have the legs to support oil prices alone as both types of price bounces historically have typically faded as quickly as they come on. So, we could expect some natural downward price moves as oil markets supply naturally rebalance to the current. equilibrium
The unexpected US supply disruption provides another short-term price recovery bridge that has likely taken oil prices to a level where markets were eventually heading but just a little bit quicker than expected.
And with the polar vortex type freeze anticipated to hang around most of the week, compounded by a surge in demand for oil futures from non-traditional oil patch investors as an inflation hedge, at minimum, it suggests we may have entered a new upper bound range with few reasons to doubt that fundamentals will justify further recovery in oil prices to long term equilibrium of USD 65/bbl and likely beyond by year-end.
The focus will soon shift to the OPEC+ meeting taking place in early March. It will be necessary for the group to continue to present a unified front and convey the impression that it is still enforcing supply discipline.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi