International market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi,
US stocks climbed to record levels overnight after President Trump signed a Covid-19 aid bill forestalling a government shutdown and ending uncertainty about the spending package’s rollout.
Indeed, the EIP and unemployment checks provide that immediate key consumption bridge through Q1 until the vaccines become more widely distributed.
The stipends will arrive quickly and are spent rapidly, providing the US economy with immediate retail sales spending bonanza boost. This splurge could be multiplied X3 if the Senate agrees to rubber-stamp support for increased Covid checks to USD2000 from USD600.
Oil may find more support
Oil markets feel very rangy into the New Year but should find support today from broader risk markets as stocks are soaring on the prospects of larger stimulus checks.
However, for oil markets gains could be limited due to the new Covid-19 variant and OPEC meeting overhangs.
After stalling out at Brent USD52 as the stimulus relief rally gave way to the new variant virus reality which might pose significantly more downside risk due to mobility restrictions than current demand tailwinds for oil which sees January demand is currently on shaky footings.
Oil prices then fell after Russian Deputy Prime Minister Alexander Novak hinted that should oil demand recover next year faster than currently expected, member states could adjust the terms of the current OPEC + production agreement.
After watering down the original January production plan to 500,000 bpd from 2 million bpd, the surging oil prices suggest smaller states would be eager to bring more barrels back to the market.
The question is how much and how quickly and by what capacity the cartel will turn on the taps. But one certain thing is that OPEC+ needs to ensure its production capacity meets demand rather than leave it for US shale; suggesting all production decisions will be guided by price.
Despite tempered volumes, the US dollar reacts negatively through the usual EURUSD higher risk on channels like rallying global stocks.
However, traders look more interested in risk reduction than adding so activity could be rangy with EURUSD 1.2250, for example, providing good resistance. In contrast, 1.2200 looks like solid support overnight.
EUR gains favour
Everyone wants to own Euros into 2021 as the currency stands to get support from favourable valuations. Investors may look to tap into European equities, for example, which are cheap and under-owned. Extensive fiscal and monetary policy support in the US that seems set to continue, spilling over to the rest of the world in the form of wider twin deficits, should fuel a weaker dollar by encouraging US corporates and investors to pursue enhanced returns abroad.
And then there is the compression of risk premium in Europe driven by the ECB’s PEPP program, which was extended and kept peripheral spreads tight.
Gold needs more support to reclaim USD1900 level
Gold traders have their eye on USD1900 for year-end, but the yellow metal will need a bit of help from the USD to get over that finishing line.
But if the US Senate agree to an increase the amount per person to USD2000. If such an increase has been agreed that would cost about USD400 billion more, bringing the overall cost well over the USD1 trillion mark that might bring music to gold investors’ ears as bigger deficits are bad for the US dollar and good for gold.