Major US indices recovered from earlier losses to end Thursday on a high note, thanks in no small part to US stimulus efforts finding their way into the domestic jobs market.
The strong late-session comeback coincides with a decline in the VIX volatility index. It was down a massive 6.5% and below the critical level of 20, suggesting a robust late session systematic bid to the S&P500, not necessarily an active investor buy-in.
The big beat on jobless claims certainly helped the view – down 97k to 684k and to their lowest level since the week ended 13 March 2020.
But idiosyncratic factors might be at play – the significant fall was driven by two states – one of which, Illinois, returned to in-classroom learning. Still, perhaps a positive sign of things to come as other states go back to school.
The trend in both continues to head lower but the tone in markets has shifted as of late with commodities having taken a step back. The latest US$1.9 trillion in stimulus now behind us and nothing new really from the Federal Reserve.
In general, there is more in the price now with less economic upside uncertainty ahead, so how markets react to positive data in the coming weeks, especially next weeks payrolls number, will be critical to keeping this ship sailing on an even keel.
Bitcoin lacks the bounce
Chatter about the lack of a bitcoin bounce on the current round of stimulus checks continues at market corners, which goes back to an idea if asset prices have been inflated by stay-at-home (think crypto, art, collectables, NFT).
A re-open could take away some support. Newly printed cash will find its way into NCAA basketball bets and the real economy now that restaurants and Vegas (aka domestic travel) are re-open for business, probably not TSLA or DOGE.
Oil prices drop anew
There was no specific news behind the sharp drop in oil overnight. The Suez Canal blockage’s transitory nature gave way to general nervousness around rising COVID -19 cases in Europe, India, and Brazil.
And with an enduring safe- haven bid under the US dollar continuing to pressure oil prices, eventually, the trap door sprung and triggered a ferocious sell-off.
And while sentiment was thrown an economic lifeline in the form of quickly repairing US job markets, it did provide a soft bid, but the bearish sentiment seemed to be winning out as the bounce was unconvincing.
Given the rush for the door over the past week, there could be some systematic de-risking adding to the momentum as the contango in oil is signalling that we may be entering the beginning of the end of the oil reflation trade as the market starts to price in the “reality check” as opposed to the” stimulus check” with the pandemic surging again around the globe.
Renewed lockdowns in Europe have dampened the immediate outlook for European oil demand. At the same time, UK politicians provided a not-so-subtle reminder it’s far too early to consider flying to the sunny shores of the Mediterranean and disrupting hopes for a rebound in air travel.
Indeed, the reimposition of lockdowns in Europe and the resurgence of COVID-19 in hotspots worldwide does little to improve the prospect of regional travel and leisure sectors.
Now even what glimmer of hope there was around summer travel re-opening would be questionable given the new global spread and concerns over the new variant.
Yes, the pattern around European lockdowns has been to fade the fear around the growth implications. Still, the backdrop in past lockdowns included a lot of upside speculation around the upcoming fiscal stimulus.
But now the $1.9 trillion in US stimulus is behind and eye-grabbing headline numbers of $2 trillion, $3 trillion or even $4 trillion for the infrastructure package out there. The uncertainty now is more around how long it will take to deliver and how high taxes may fund the spending.
US dollar gains on robust jobs data
The dollar bulls were rewarded by staying the course and betting on the run of more robust US economic data after the US jobless claims beat expectations.
The Federal Reserve is almost going out of its way to warn the markets it will not step in and somehow control yields. It seems the path of least resistance for the US dollar should be higher as the US economic data improves and yields move tangentially higher.
USDJPY sits comfortably above 109 after BOJ Governor Haruhiko Kuroda’s comments that it was too early to think of exiting accommodative policy, including ETF purchase. While slightly firmer US yields post better than expected jobless claims round out the supporting act.
So far, front end rates remain well-behaved, buying into the lower for longer mantra. But if the data improves and the front end reprices higher again, the dollar gains big. The very moment the market convincingly decides the FED will be on the move in 2022, you don’t want to be short dollars in that scenario.
Strong US dollar weighs on the Ringgit
The latest oil price meltdown and the current dash for dollars (USD) have wholly eroded any glimmer of near-term hope for the ringgit.
Gold a tad softer
Gold is trading a bit softer after robust US economic data pushed the US dollar higher and underpinned US yields overnight.
Market analysis from Stephen Innes, Chief Global Market Strategist at Axi