It was defiantly one of those sessions for equity markets where one needs to look beyond the broader indexes to get the whole story. The market is holding up very well, considering how much paper came to market last night.
Still, Investors are taking a glass half full approach right now, no matter what, while looking out six months and running on monetary and fiscal fumes to bridge that gap.
And the street remains on the elusive stimulus watch, where even a skinny offering will assuage the market’s concerns regarding the never-ending bipartisan squabble.
But the US has plenty of existing fiscal stimulus to spend, and if Congress does not pass another package before year-end, it’s not the end of the world.
Vaccine roll out sooner than expected?
US households have many savings to provide a backstop, even if this simplistically ignores those savings’ distribution. And while there are mega constraints to the economy over the near term, the medium-term prospect looks so bright given the vaccine roll out much sooner than expected.
There was a softer backdrop on the index level overnight as the big focus was on how the market will digest the onslaught of share issuance from Tuesday.
It is not so much about rotation today – though the re-open trade is outperforming slightly as 10y yields continue to climb. There has been a notable pickup in single-stock dispersion and plenty of single-stock volatility while the VIX continues to hover just above 20. Volumes are much lighter today, which is a contributing factor.
Fixed income under pressure
Fixed income is coming under pressure again, but unlike earlier in the week when break-evens were a major part of the selloff, this is all coming in real yields. Most of the move in 10-year rates comes from real yields with almost no change in break-evens. That might explain the rather lacklustre performance in stocks with e-minis hovering around the mid 3600s.
It is far too early to get into the Fed pulling out of dove mode argument, although some are already harping about that, including myself. But that is a story for the rotation into 2022, not next month.
You will start to read and hear a ton of rhetoric about “peak vaccine” as some current price actions suggest sentiment is at or near the peak. EM has stopped appreciating, oil cannot rally, FX breadth is increasingly narrow with only the EUR rallying while AUD and NZD are not breaking new ground, and GBP looks soggy.
The S&P 500 took out the Pfizer announcement day high and failed to capitalise. The rally in US nominal and real rates should also make it harder for the US dollar to sell off from here and gold to rally above $1850.
I buy that argument into the holiday season, especially this year. Investors are bound to defend profits given we are at a level on stocks that no one expected.
Still, the latest PMI numbers print stellar and remain on solid footings. And should set up well for a strong global recovery, should the vaccine support growth into H2 2021, as is widely expected. Ultimately this should be a panacea for growth stocks.
Tension within OPEC putting pressure on oil prices
I expect oil to be whippy but confined to current ranges until OPEC+ signals the all-clear for traders to shift oil prices back to recent highs.
Reports were hitting the streets of unnamed OPEC+ delegates saying that progress is being made on talks about production cuts. That, combined with the surprise US inventory draw today, has triggered a move up in oil.
Discussions will continue in earnest, and I think given what is at stake, the base case should be that OPEC+ agrees to an extension of cuts.
There are clear tensions within OPEC that may undermine market confidence in the OPEC+ deal from now on. It will be more important than ever for OPEC+ to present a unified front while waiting for demand to recover when the vaccine becomes widely distributed.
A smaller draw than consensus helped oil recover overnight. The draw at Cushing, although not large, was to be expected: with the term structure strengthening, it makes little sense to pay for storage costs.
Gasoline and distillate stocks were higher, which is the new normal. Regardless of OPEC’s decision, the product’s part of the oil complex will continue to weigh on prompt oil prices until planes, trains, and automobiles start moving with more frequency when the actual vaccine rollout effect starts to work its way through the global economy.
The weakening of the US dollar index over the past month is not to be ignored, which is also currently offering up a lifeline to oil prices.
Equity and Oil market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi