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US stocks rebounded on Tuesday following a sharp sell-off on the first trading day of the new year, as investors trained their ears and eyes to the Senate elections in Georgia that could determine the direction of fiscal stimulus and US tax policy.

But it is was the energy markets that provided the soothing balm after Saudi Arabia’s ground-breaking intervention on the oil markets overnight.

The Georgia Senate election runoffs make for an even more tenuous start to the year with investors nudging ever closer to the COVID-19 abyss.

But even if the US has passed peak vaccine euphoria as dreams of the efficient rollout are now replaced with the unfortunate logistical reality, markets remain focused on the end of the tunnel, regardless of its length.

Georgia runoff

The logical thinking is if the Democrats were to win both seats, then the knee-jerk reaction would be for the Treasury curve to steepen on higher stimulus expectations. The 10-year yield will be able to gain, but without major adverse consequence on risk assets.

It should support equity rotation, but not necessarily endorse at the index trade level, given Techs high weight and the fear of industry-wide regulation and tax hikes.

But uncertainty is still the general worry out here over what course a “blue wave” directional Index bias veers. Would the markets focus on the possible boost to government spending or don tin hats against the potential increase in tax and regulation? Or would the status quo trigger a relief rally by avoiding those tax increases or will disappointment on constrained fiscal stimulus reign supreme.

The bottom line is the market hates uncertainty highlighted by the Cboe’s Vix index, which measures the expected volatility of the S&P 500 Index.

Oil surges on Saudi Arabia pledge

Oil prices surged overnight after Saudi Arabia pledged to do a massive chunk of the production cuts heavy lifting by shouldering a voluntary production output cut by an extra 1 million barrels a day in what being described as a “new year gift” to the market by Russia deputy prime minister.

Oil prices surged more than 5% today on the positive outcome of the OPEC meeting. In a spearheading statement which is bound to win over many friends in OPEC+ high places and stamp their leadership over the producer’s group, Saudi Arabia unilaterally decided to cut production by one million barrels a day for both February and March in an agreement allowing Russia and Kazakhstan to lift output by 75,000 bpd in February from January levels and another 75,000 bpd in March.

The Kingdom’s willingness to face the music and hit the supply brakes is the colossal signal that the behemoth oil producer will go that extra mile to defend oil prices while simultaneously recognizing the short-term demand risk as the new virus variant threatens s to clog up the path to oil demand normalcy.

Indeed, this policy pivot fortifies the policy bridge that will span the economic demand-side gap until the vaccines are more widely distributed.

WTI topped $US 50 a barrel and Brent traded shy of $54 a barrel before profit-taking set in after media reports that Asian refiners will not be getting into long-term contracts this year as demand concerns linger and margins remain soft. So, despite Saudi Arabia’s ground-breaking efforts, we are not out of the woods just yet.

Forex markets in a knot

The FX market has knotted themselves up like tightly coiled spring just waiting to pop out of the box regarding the Georgia runoff. Indeed, it feels like the Street is just waiting for the event to pass before shifting back into dollar shorts vigorously, and it is not too late to get back on board.

As this nascent stage of the economic recovery, it is hard to think that current FX levels have priced in the lengthy vaccine recovery if anything the Georgia senate runoff.

Petrol currencies are flourishing USDCAD hits new lows at 1.2657 as the crude surged overnight. The pivot area at 1.2725/30 should provide resistance now and the 1.2550 area support (April 2018 low).

The GBP steadied in London after the UK stimulus relief rally on the FTSE. Still, the broader market is suffering from a case of Covid-19 indigestion as new worldwide lockdown continues to foster a wider “risk-off” mood.

Better than expected German data may have helped stabilize the EUR this morning. The 37K drop in the numbers unemployed during December was much better than the consensus, which looked for a rise of 10K. The gains came despite the imposition of additional COVID-19 containment measures in mid-December.

After struggling under the weight of energy releases profit-taking yesterday, the Malaysia Ringgit should receive a fillip from higher oil prices today, and the momentum arc should shift back bullishly towards the USDMYR 4.0 psychological level.

Gold holds on to gains

Gold is in a holding pattern ahead of Georgia runoff results.

Gold continues to trade on the front foot after a roaring start to 2021 for TIPS, which outperformed about everything on Monday and reached new highs.

It feels like there was a wave of last-ditch efforts effort to have the ‘blue wave’ trade on ahead of a Topsy Turvy Tuesday Senate election runoff in Georgia.

We will see a pause in action today until the election results are released as any disappointment (i.e., no blue wave) there could some pullback. However, with a long end of the curve firmly supported by the reflation narrative, gold could remain well supported on dips.

International market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi