US stocks edged lower overnight as investors await the details of the incoming Biden administration’s plans for a new coronavirus relief package.

After many dovish comments, US Federal Reserve’s chair Powell finished on an optimistic note, saying there are many reasons to think the economy could recover and do well, saying it could be back to pre-virus economic peak reasonably soon.

Still, US equities were slightly weaker as investors continue to fret over rising US yields US10Y yields which reversed yesterday’s losses.

Why the cautious tone?

It’s difficult to say with complete certainty, but investors might need a bit more convincing through multiple critical fronts as it’s never comfortable taking that next leap of faith especially when we are already within the grasp of some year-end targets on some stocks, and we are only in the middle of January.

Investors may want reassurances that the trickle-down effect from the government stimulus efforts reaches the devastated parts of the economy where it’s most obviously needed around servicing and hospitality sectors.

And the bulk of the deluge doesn’t get moped in speculative fervour and other unnecessary concerns.  Main Street, not Wall Street, needs the majority to drive the full-throttle recovery.

Given investors have priced in so much economic lift-off in the second half of the year, they might need a little bit of convincing that those blue-sky expectations will come to fruition via a relatively seamless distribution of the vaccine.

In the meantime, the dual policy puts monetary and fiscal policy backstops making it challenging to shorten the market with any gusto.

And of course, different parts of the world are moving at a different pace leading to more rotation uncertainty.

China leads the pack, and the US is in catch up mode while Europe is still in lockdown mode and has worryingly fumbled the vaccine rollout efforts.

Still, the sharp rise in US bond yields is a troubling topic of conversation, but for now, the impact has been felt more in the currency markets than in stocks.

However, if US yields shift into a hyperbolic model and provide a lift-off to the US dollar, risk markets will have something to consider, especially if the US dollar chokes off the reflation trade.

So, stock markets are pausing at all times highs as investors collect their breath maybe even hoping the market sheds a little bit of over-exuberance so they can buy in at cheaper level.

The support from vaccine rollout, the dual policy puts via monetary and fiscal backstops and the likelihood of more fiscal stimulus paints a very compelling picture for the US economic recovery, hence earning growth this year, which should pave the path for equities to shift higher.

Oil rises on stimulus expectations

Oil prices are higher rising to a fresh ten-month high on stimulus expectation as consumers could spend a portion of the direct deposit on gasoline purchase.

But it’s perhaps the infrastructure component of the US  stimulus efforts that will resonate bigger given the current COVID concerns that are pushing back on gasoline demand.

And with Saudi Arabia providing the cornerstone and bridging the gap to vaccine oil market lift-off. The renewed enthusiasm about the US demand recovery due to the prospects for more stimulus and the new administration’s pledge to focus on the vaccinations’ rollout, oil prices are lifting higher locking to hash out higher ranges.

We are entering a critical phase as oil remains sensitive to the news with negative implications for the demand recovery. How seamlessly the market shift from OPEC rally cry, out of the stimulus bounce and into the vaccine distribution lift- off-channel will be critical.

Vaccine distribution will put more planes back in the air, which is the missing piece in the jigsaw puzzle and key to drawing down on the omnipresent product side of the equation.

The oil market recovery is vital for blunting the effect of higher nominal US yields through the reflationary channel. If oil doesn’t fly higher, the reflation trade could fall flat on its face.

Published by Stephen Innes, Chief Global Market Strategist at Axi