All Quiet On Eastern Front; Restrictions Weigh On U.S. Equities; GBP Recovers

All quiet on the Eastern Front after a Manic Monday morphed into the Nightmare before Christmas, PBoC eases building year-end pressure. 

After a Manic Monday morphed into the Nightmare before Christmas, understandably, investors appear to be treading more cautiously in Asia this morning, getting more selective and probably waiting for the new mutant virus to be better understood before aggressively diving back into the Airlines, Travel and Leisure vaccinated bandwagon.

I think it will be tough for investors to get back in the saddle given the seasonality factors, and they might be willing to float over the finishing line supported by the stimulus balloon. 

PBoC Liquidity Injection To Ease YE Pressure

The People's Bank of China injected CNY10 bn via 7-day reverse repo and CNY120 bn via 14-day reverse repo to the interbank market. The 14-day fund should help ease some year-end financing pressure on Chinese banks as they will not be due until after the New Year. CNY10 bn 7-day reverse repo will mature today. That brings net liquidity addition today at CNY120 bn, the most so far this month via the short-term funding measure.

FX to turn more transactional due to year-end 

For example, looking at the Aussie, G5 short-term interest rates are on the quiet side, but AUD has taken a plunge lower, and there seems to be no end in sight. Indeed, this is being driven by both the day-to-day funding collapse, which is independent of the year-end, and all tenors further outgoing lower on some panic s/b of AUD in the market. The year-end AUD turn is now -4.3%, about 200bp lower than Friday's close, and 1m is about 50bp lower.

Everyone has a plan until they get punched in the mouth.

Yesterday should be a stark reminder no plan survives the first major deflationary contact, where there is no point thinking about strategy when you are being punched in the face. Instincts take over, and it is all about the survival of the fittest and those who have prudently laid down counter risk control that allows them to survive another day.  

It is challenging to explain the heat of the meltdown moments unless you have been on the market desk. Still, suppose you can imagine a stampede of elephants trying to get through a porthole window and dive into the life raft. In that case, that best describes the events that transpired in London yesterday when a nasty cocktail of transport links with the rest of Europe being cut coalesced with another Brexit deadline missed. At this time of the year, hedging costs are expensive, and often it is easier to cut and run than dig yourself into a deeper and more costly hole.

Markets

Mobility restrictions finally caught up with US equities yesterday, but the 'buy-the-dip approach' is still very much intact.

An escalation of European COVID -19 restrictions in response to fears around a new variant, which is supposed to be faster spreading, should, and did, of course, elicit a negative reaction from prices via the near-term global growth impact. Still, ultimately it should not damage the longer-running global reopening impulse for 2021, given these new mutations are not likely to be immune to vaccines. Illiquid conditions will persist through year-end, but dips like this could present more of an opportunity to fade than anything else.

Stock investors can count their lucky blessings the multiple vaccines in the pipeline are inoculating downside risk. Simultaneously, the US stimulus bill should allow investors to glide and navigate the numerous viral air pockets across the year-end finishing line. 

The US COVID-19 relief bill got rather whitewashed yesterday despite being a major achievement in this lame-duck session. Ultimately this holiday stocking stuffer of a deal should be positive for US markets because a) this is the second-biggest stimulus package ever, and b) parts of the package expiring in March will create the prospect of a follow-up package in Q1.

Still, I do not think we are completely out of the weeds just yet. Yes, 2020 is ending, but COVID-19 and fiscal policy will always be at the center of the debate. Now investors have " Georgia on my mind." So,  with the December FOMC behind us, the pair of Georgia Senate runoff elections (on January 5) represent the next major source of event risk for markets.

While I still think stocks have a long way to run higher in 2021, still another market manic Monday shows the potential dangers of the market being universally the one way.  

You will read a lot of after the fact analysis suggesting yesterday was a holiday exaggerated selloff. While to a large degree, that might be the case on some overbought positions like oil and short dollar. However, ignoring these early warning signals and not brace yourself for a challenging start to 2021 is flat out dumb. Indeed, this could only be the tip of a reflationary washout. The risk is growing for significantly extended lockdowns in several countries. There is a gap to be bridged between now and when experts expect herd immunity—in the middle of Q2 at the earliest.

GBPUSD Recovers Amid Positive Brexit Headlines

GBP/USD is staging a recovery. Media reports the UK is willing to lower the EU haircut for fish caught in the UK waters down to about 33% from 60% previously, while the EU had last said 25% was their best and final offer. So, while they have not yet reached an agreement on this aspect, the gap has now narrowed, and the chances for a deal somewhere in the middle have increased. Still, any sign of progress at this late in the game should make a deal that much harder to walk away from completely.

Oil markets

Oil slid and then finally crashed off the end of the reflation runway before bargain hunters helped lift Brent crude back above $50.00. The nefarious mobility restriction linked selloff saw both grades drop about 6% amid the new super-spreading strain of the virus, which sees politicians mandating more mobility restrictions in most of Europe. And with the UK at the epicenter, it triggered absolute border pandemonium. 

But a COVID-19 relief deal was finally passed by US Congress, the Pfizer (NYSE:PFE)/BioNTech (NASDAQ:BNTX) vaccine was approved for rollout in the EU starting next week, and the fact the new virus mutations are not likely to be immune to the vaccine helped support the reversion rally.

After an incredulous 30% upswing since the first vaccine high efficacy data was released in November, both sentiment and fundamental were flipped on a dime due to an apparent super strain virus scare and reported Asia crude demand slowing after a much earlier than usual buying spree likely triggered by a currency discounting factor.  

With the market incredibly overbought and the ratio of longs vs. shorts entering the week at almost 4.5 to 1 primarily driven by vaccine euphoria and Asia physical demand, the largest since January, naturally, such an unbalanced positioning could result in a dramatic selloff should sentiment shift and the overnight moves did not disappoint the bears.

Forex markets

EUR

After what is getting viewed as a garden variety USD correction overnight triggered by Brexit fears, but mildly exaggerated by holiday conditions and compounded by the latest FOMO USD short positioning build, the EURUSD found an abundance of buyers on the deep dip into the 1.21 handles. The "short dollar" clear-out is probably nothing more nefarious than stretched positioning getting taken out to the woodshed on Brexit scares.

However, it shows the potential dangers of universally bearish USD sentiment as we roll into 2021. Still, with any currency pivots, they should never be taken lights as FX markets tend to provide early warning signals, and we need to be on our toes through year-end and well into 2020

MYR

The Malaysian ringgit could claw back some losses on recovering oil market sentiment, but still, year-end position squaring proclivities could be the order of the day as the FX markets become very much. transactional rather than speculative at this time of year 

THB

The thai bhat hit the skids as travel and leisure stocks tanked on the new European mobility restriction. Even domestically, my plans to attend a New Year moon festival have been quashed by the local government imposing celebration and larger gathering restrictions after a recent cluster outbreak in Samut Sakon, far too close to Bangkok.