Stocks
US stocks pared gains on concern that lawmakers will pass a smaller stimulus package after encouraging developments on the coronavirus vaccine front. Senate Majority Leader Mitch McConnell said Congress should pass only a limited bill before the end of 2020. Meanwhile, the Federal Reserve warned that asset prices in key markets could take a hit if the pandemic’s economic impact worsens in the coming months.
Asian equity markets lacked the euphoria seen in Europe and the US yesterday. Although Asian markets managed to squeeze out further gains, they were minimal compared to their western counterparts. China also bucked the trend with both onshore and offshore equity markets trading lower, perhaps due to tightening scrutiny of internet firms as well as weak inflation data.
Mini SP futures also struggled and provided a boost to fixed income. However, this proved short-lived because as soon as Europe arrived, the euphoria picked up again. Mini SP500 future have rallied 1% since 0630 GMT while the DAX has managed to rally 1.4%
However, I think some caution is warranted, especially on equities. For now, I think investors should obviously go with the momentum as it makes little sense to try and stand in the way of moves. But it will be interesting to see whether the equity rotation out of tech and into other sectors actually sticks or if it is largely a factor of the market being caught underweight.
Bonds
One of the key questions for rates now is how much of yesterday's selling flow was longs closing instead of accounts setting fresh shorts. It is difficult to quantify that after one day, but the move's pace suggested it was perhaps more about longs closing, especially those with a systematic / trend bias. That does suggest that accounts will be looking for opportunities to set shorts, perhaps limiting the scope of any fixed-income rallies. Fixed income bears now benefit from a massive shift in the technical picture, which has left both USTs and Bunds susceptible to the downside.
One other problem for fixed income bears is that central bank officials are unlikely to turn hawkish because of the Pfizer (NYSE:PFE) news suddenly. Comments last night from Fed Governor Quarles and Dallas Fed President Kaplan support this. Quarles noted that "the surprise of the COVBID event is gone, replaced by a clearer view of its economic consequences." In his view, "distinct, formidable and complex" challenges remain. Meanwhile, Kaplan warned the resurgence of cases poses a downside risk. Not exactly rock science but something the market needs to consider. This suggests that the market moves into a new range capped by the 1% level in US 10-year yields.
EUR/USD Profit Taking
There was a sharp rally for risk on the back of the positive covid vaccine news yesterday. USTs sold off, and the move sparked a flurry of USD buying, with EUR/USD—which usually flourishes in a risk-positive environment —suffering from profit-taking. Some market participants might consider these levels around the 1.18 handle as a good entry point to establish EUR/USD longs. If 1.1770 holds, that might prove to be true,
Gold Sells Off Sharply; Flows Pick Up
Gold sold off sharply after the positive covid vaccine news yesterday. It's not entirely clear gold should suffer too much on the back of that, as the positive correlation with equities has still been somewhat significant over the past few months. But extended long speculative positioning seems to have contributed to the extent of the selloff. There has been a decent pickup inflow, with fast money selling and real money buying.
Two puts are better than one
Oil continues to remain supported and even bid up on the 2 puts are better than one premise supported by vaccine news and OPEC+ uncompromising stance to backstop oil markets when Saudi Arabia's energy minister, Prince Abdulaziz bin Salman, at the ADIPEC conference, said OPEC+ cuts were to be extended to 2022. Mind you I'm still stitching my head to read some reports that this bullish combination doesn't alter the oil market fundamental landscape?