Global equities traded on and even keel overnight as robust earnings from the market darlings and widely held Alphabet Inc holds the ballast in check.
At the same time, positive results in Europe also provided a lodestar of optimism. And framing the positive scrim, oil prices advanced almost 2% after OPEC+ signalled they would maintain their output policy to rebalance the market. And higher oil prices always provide an encouraging perspective.
In an attempt to draw on bipartisan support but mainly to appease fiscal centrist Democrats, US President Joe Biden has floated the prospect of keeping the size of stimulus checks unchanged at $1,400 but reducing the number of recipients: “we can better target that number”.
The VIX recovers much quicker than usual
The VIX is the markets’ primary watchtower and it has likely caught more than a few by surprise how quickly the attack of the so-called “meme stock” shorts has subsided and how fast last week’s massive VaR and VIX triggered sell-off has recovered.
It’s not a coincidence, but none less striking how quickly the VIX has declined since last week’s dislocations.
Since 1993 there have been 29 days on which the VIX has moved 15 points higher over five days. Usually, the VIX is still higher five days after the increase.
However, this time, the VIX is already down to the 25 hands and 3 points away from the pre-meltdown level. Events with innocuous beginnings have often morphed into something much more sinister, but not this time.
Presumably, it’s yet another example of the volatility smothering effect of central bank policy.
Indeed, this was never a macro risk-off event and the dip was always going to get hoovered just not as quickly as what happened. But thanks to the rapid recovery on the VIX and the enduring policy puts it was all hand so deck for the relaunch of the risk-on steamboats.
And better economic data overnight helped frame out the return of the bulls. In the US, ADP employment more than double consensus in Jan: 174k, with upward revisions. And likely to boost expectations for payrolls Friday, which continued to keep US equities on and even keel throughout the New York session.
Oil sets up a bullish path
The API stock figures released on Tuesday were particularly bullish with inventory draws across the board. However, the official numbers from the Department of Energy (DOE) painted a different picture – a small draw in oil stocks and another large build in gasoline which triggered some profit-taking off the market intraday high.
However, traders quickly chalked up the difference to a massive influx of Canadian oil. Bids promptly returned as inventories should rapidly deplete due to the heating needs as a blustery cold snap and winter storm conditions continue to blanket the US east coast.
Indeed, the April Brent contract has gotten off to a flying start coinciding with a cold snap in the US and let’s not forget about China, the world’s second-largest consumer is also experiencing a bout of frigid weather.
The main takeaway from the JMMC meeting and bullish for oil prices is that OPEC said it expects OECD oil inventories to fall below the 5-year average by the middle of 2021. Of course, this is assuming that Chinese buying does not backpedal as prices strengthen.
Declining stocks indicate recovering demand and will make it easier for OPEC+ to gradually normalise production and reduce the spare capacity cushion that limits oil upside over the medium term.
While global economic data has been improving, there are still plenty of residual lockdown concerns as evidenced by yesterday’s China service PMI slump. Still, OPEC’s disciplined supply management regimen continues to help investors look through any near-term uncertainty.
Nonetheless, the closer we shift towards Brent $60 per barrel, one would have to assume it could be a potential faster game-changer and OPEC + production cut unwinder. Not to mention US shale will be eager to step on the production accelerators.
Equity and Oil market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi