The rally in US equities is very impressive. Perhaps the street had underestimated just how much cash had been raised over the past few weeks and how eager investors would be willing to put it to work diving back into the “lower for longer” interest rate trade, which has categorically been one of the rallying cries of this enduring bull market cycle.
Instead of no-wave lead balloons, the market continues to float on the lower for longer policy balloons.
There is some momentum behind this as the market seems to like the outlook for moderation (Biden/GOP) combo. We went from unwinding the blue wave trades Wednesday to flipping the risk-on switch Thursday.
Now, what does Freaky Friday have in store? I would suspect it will be a day of consolidations with fast money folding their hands as the US election winner could be announced over the weekend, and who knows what happens from there.
Most striking about the election aftermath is the extraordinary divergence between equities and fixed income. Stock investors seem entirely comfortable with policy gridlock, while bond investors got smacked by the mirage of the blue wave.
Equity markets’ impressive ability to switch narratives and stay optimistic, almost regardless of the outcome, suggests continued high resilience.
But in fixed income, one needs to err on the side of caution here, assuming that the position clean-out might have pushed things too far, particularly if we get hit with positive vaccine news.
But even on the vaccine front, what if it does not provide the game-changing panacea? One thing that is starting to worry me is the market is unprepared for vaccine faux pas.
Every market street corner trader seems to be talking along the lines of “when there is a vaccine” with little consideration of the ones in trials proving ineffective or for a rollout that is not as smooth as hoped.
To that end, AstraZeneca has fallen short of its target to deliver 30 million Covid-19 vaccine doses to the UK by the end of September and will be able to supply only 4% of what it promised by the end of the year, according to the head of the government’s vaccine task force quoted in media reports.
The oil market weighs the possible impact of more significant restrictions on domestic US oil and gas production from Joe Biden’s presidency versus more support for energy transition and the probability of re-engagement with Iran.
The latter seems the most significant risk for the oil price, but it is unlikely that it will be a priority for the first year of a new administration.
By far, the most critical questions for oil are how quickly a Covid-19 vaccine is widely available, whether a US stimulus deal can be achieved in a fractious and uncertain political environment, and how OPEC will respond to demand concerns.
I suspect if the market knew with any degree of conviction how any of this critical for oil prices dominos would fall into place, traders would likely stop riding the Covid-19 curve roller coaster, which tends to crest peaks quickly and drops even quicker.
But as we head to end yet another roller-coaster week in the analysis of oil trading, one would have to think it is encouraging that OPEC+ continues to signal that the group will do what it can to backstop the oil price while we wait for the demand outlook to improve.
Equity and Oil markets analysis from Stephen Innes, Chief Global Market Strategist at Axi