The spotlight will again be on Washington DC this week while the FOMC meeting on Wednesday is competing for centre stage. The new US Congress expects to begin crafting legislation to implement the Biden Administration’s priorities for the next recovery phase.

It appears there will be more than a few Republican stonewalls to clear for anything other than Presidential executive orders to hit the ground running.

With investors in “what could go wrong now mode”, this week could provide a good sentiment gut check after US equities closed a bit lower on Friday, but didn’t paint the big picture as investors turned decidedly risk-off late last week due to COVID-19 concerns and the negative economic knock-on effect from the seemingly never-ending lockdowns.

At the same time, investors took their foot off the gas into earnings season, so the key might be how quickly it will take them to go pedal to the metal again.

Vaccine breakthroughs make it likely that life will become more functional again at some point in 2021, resulting in higher GDP growth and more robust corporate earnings. But increasing global COVID-19 infections, new variants of the virus, tightening social distancing restrictions and delays in vaccine rollouts in some places, all increase the near-term growth risks.

This tension was magnified tenfold through the China Lunar New Year lens effect where the resurgence of Covid-19 in China provided a most unwelcome surprise. The speed and effectiveness of the vaccine rollouts and the rising case numbers create a high degree of unwanted uncertainty around the outlook.

In the past, weaker growth meant looser policy, but now we are likely at the end of the US policy runway, the market doesn’t have the luxury of policymakers to inflate those balloons further to float on.

Ultimately at this stage of the recovery cycle and to provide quicker and better economic health, it’s all down to the vaccine distribution

As for the FOMC meeting, the Fed forward guidance promises to keep rates low and ignore reflationary impulses or more robust data. If markets believe this guidance, they will refrain from pushing interest rates in response to positive data surprises.

The key here will be if the market continues to trust the guidance and not push US yields higher.

Low demand continues to put pressure on oil

The Lunar New Year headline heebie-jeebies did a number on oil prices into weeks end. Yet after hitting an intraday low US$54.48 per barrel Brent crude managed to close above US$55 despite the clear demand impacts of lockdowns in Europe and additional measures in China.

The enormous question mark remains around demand and supply.

The street uniformly downgraded 1Q21 market in the world ex-China due to clear demand impacts of lockdowns in Europe to start the year. But last week it was back to the downward demand revision drawing board.

More worryingly, however, since Asia has been the backbone of physical crude oil demand, this time it was to down-ballot China consumption as lockdowns spread in the country just weeks ahead of the Lunar New Year travel surge.

The second risk is around supply, given that the price rally might encourage a wave of new supply from US drillers and OPEC members themselves, saturating the market.

Still, the one million barrel per day of additional Saudi curbs over February and March should alleviate the currently projected level of attrition in global demand recovery without much impact on the path of OECD inventory draws.

An executive order from US President Biden that restricts new drilling on federal land for the next 60 days surprised the oil sector and raised concerns about its administration stance.

In a case of what is terrible for companies exposed to US drilling activity is good for the oil price, which perhaps helps explain why oil prices did not react as negatively after the US Open on Friday— which was then complemented by refinery utilisation which was up +50bps to 82.5% of operable capacity (consensus was +40bps), its highest level since Mar-20.

However, a focus on a more efficient rollout of vaccines also helped buttress the Lunar New Year anvil effect.

In the US, the number of Covid-19 patients in ICUs has started to drop over the last week. Simultaneously, the vaccination campaign has picked up momentum and is already close to the new administration’s target of one million shots while only running at 50 % capacity, so there is much room to grow.

Published by Stephen Innes, Chief Global Market Strategist at Axi