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Markets are opening with a small wobble on the risk axis this morning as perhaps investors reaching a near term inflexion point. However, it’s too early to say as investors have their feet firmly planted and continue to roar like lions supported by a lengthy vaccine runway paved with US stimulus.

Dramatic moves over the past days following the Georgia elections have been triggered by a larger fiscal stimulus and a stable monetary policy. But the word “taper” has increasingly featured in Fed rhetoric, so the street is already keeping and an eye on the Fed as they start to shift on this front.

This glorious 10-month rally has been unilaterally supported by stimulus and Fed policy air balloons. Even the slightest hint at letting air out of one or the other unquestionably will turn investors a bit fidgety and less gleeful to take risk higher.

Also, the omnipresent Covid concerns continue to hang like a nasty cloud over the market and given a great deal of optimism in stocks and oil is linked to the rollout of Covid-19 vaccines, investors are sitting with finger and legs crosses that there won’t be any negative news flows on this front would prompt a sharp negative market reaction.

And US-China friction content to build as the Trump administration removed US-Taiwan restriction in a move that is likely to enrage China. And it will propel the first week of the Biden administration into a stand-off with China and the Democrats. Backpedalled, the Republicans will happily portray the new White House administration as soft on China.

Oil markets

Friday was a good day to stay long as oil futures were in big demand at commodity index rebalancing. But with that demand now in the rear mirror, it’s back to physical demand concerns with Covid hot spots flaring again in Asia, with 11 million people lockdowns in China Hebei province.

Indeed, this along with a touch of FED policy uncertainty has triggered some profit taking out of the gates this morning. Unquestionably one of the biggest risks to the view is the spread of Covid in China.

But oil traders have done an excellent job sidestepping lockdown threat suggesting that unless the vaccine doesn’t work against the new variant, oil prices will remain supported.

It’s been a great start to the year with both Brent and WTI at levels not seen since Feb-20 and the pandemic’s initial impact in western economies.

The Democrat sweep of Georgia run-off elections helps to address one of the key medium-term risks for oil – the potential supply response from US E&Ps. The Biden administration, now with support from a Democrat-controlled Senate, may be more likely to impose restrictions on US oil companies, for example limiting drilling activity on Federal land, which limits the medium-term production upside from the US and therefore diminishes one of the key downside risk factors for oil.

Oil is still pricing in a great deal of optimism linked to the rollout of Covid-19 vaccines and any negative news flow on this front would prompt a sharp negative reaction.

Demand will always improve as the vaccines roll out, and the supply side is under control thanks to OPEC+ and Saudi Arabia’s continued efforts. Risks remain, but there appears to be a clearer path to oil upside with downside risks diminished.

Published by Stephen Innes, Chief Global Market Strategist at Axi