Global equities suffered their first set back of the week as New Year’s Eve pipe dreams fade that bigger government paychecks will soon be on the way triggering some profit-taking in US stocks.

With little under two days of trading left in 2020 and investors not pinning hopes on a stimulus check compromise before the New Year, one might expect equity markets to turn quiet.

And given the tumultuous year that we have had, “The Street” could use a few days off so if anything, investors might continue to unwind risk, like what we saw in the US market overnight.

Still, champagne corks are readying to pop after a hugely and highly unexpected profitable year for many investors. But it would have been nicer to see a $2000 check in the mailboxes for those that needed it the most.

After a meteoric rise as risk dominoes toppled one by one this week, stocks fell back to earth a bit overnight. And while larger stimulus paychecks would always be a welcome addition to the Q1 consumption bonanza, the current stimulus level as it sits will drive US growth sufficiently higher bridging the gap when people get vaccinated and return to those activities most impacted by COVID -19 such as dining out, travelling and other personal service-related areas.

US data is decelerating, and the recent Covid-19 wave persists, but the US Federal Reserve remains committed to keeping financial conditions easy for months to come.

Meanwhile, the vaccine narrative will eventually pave the way for the economy to escape from the pandemic’s grip in the coming months.

Implied volatility has been slow to normalize despite the stimulus bill, more Brexit clarity and vaccine rollout. The floor under the front end of the VIX curve remains firm in the 20-22 range while the belly of the curve has met friction in the mid-20s with 3-9-month futures not closing below 24. And I expect this pattern to persist until the Georgia state runoff.

Oil remains supported

Oil prices have remained supported by a weaker US dollar overnight and have finally found a friend in the API inventory report. This morning the American Petroleum Institute (API) reported a much larger draw versus consensus in crude oil inventories for the week ending December 25.

With hopes of larger stimulus checks fading, the bullish report comes as a relief and that along with the weaker US dollar should support oil prices in early Asia trade.

Any hard-fought gains will be capped by OPEC’s plans to gradually increase oil production after the start of the year despite the new Covid-19 variant increasing government and self-imposed travel restrictions worldwide. We do not have the latest variant in Thailand. Still, the local Covid-19 flare-up has cancelled many holiday revellers plans and blotted out any New Year’s celebrations, for example.

Forex markets: US dollar remains weak

Vaccines are on their way, brightening the prospects for the global economy. But the next phase of the recovery will see the international growth mix evolve, impacting trade flows and allowing no respite for central banks. After the massive collapse in the worldwide economy in 2020 the rebound is coming, led by emerging markets and their respective currencies.

US dollar weakness has been more widespread than most had anticipated where the street now expects this to persist into 2021 unless there is a surprise pivot by the Federal Reserve board.

But there are many more liquidity injections to come from the Fed as the US economy is still pretty much a wreck. It is too early to worry when the central bank pushes back against the dollar downcycle.

The EURUSD is trading 1.2250-60 today as global equities look poised for strong returns in 2021 as a COVID-19 vaccine should provide a major boost. That alone suggests you stay short dollars, especially against all the growth currencies.

Gold still flat

Gold is trading flat as it appears investors are giving up the year-end chase for $1900 as hopes of bigger US stimulus checks are fading. Still, gold will be very much tethered to the US dollar fortunes. And with the US dollar expected to flounder out of the New Year gates in 2021 could get that eventually lift to $1900.

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