Despite investors galloping out of the gates to face a brave new year, it was the same old lockdown fear that saw investors recoil as buyer beware set in. While the big macro recovery and rotation view may be the “ultimate trade for 2021”, the “January trade” could be very different as the near-term landscape got a whole lot more dangerous looking very quickly.
Markets have treated recent lockdowns more as speed bumps than hitting a brick wall at full speed.
However, the Georgia Senate runoff complicates matters as the street does not know how to trade or invest it. While it seems reasonable to assume that the status quo will see most post-elections trades pull through. But on a Democratic sweep, that is where the balance of uncertainty lies especially if bond yields scream higher.
Indeed, it was “Sound the Retreat” that was heard across global trading rooms triggered by several factors including the upcoming Georgia Senate runoffs, renewed lockdown concerns compounded by the vaccine rollouts’ slow pace.
The result of the Georgia election may be the most important event for the markets, however.
To date, investors are comfortable with a Republican-controlled Senate that would offer a balance against the potentially more progressive agenda of the Democrats under President-elect Biden.
If the Democratic Party candidates both wins, we could see an equity market correction, especially if investors worry that such checks and balances around tax and tech regulation will disappear.
It’s all or nothing for the Democratic Party who must win both seats to gain control (via a tiebreaking vice-presidential vote), while if the Republican Party wins just one of the two chairs, it will retain power. Indeed, this will have an important impact on the expansiveness or limits on the Biden presidency over the next two years.
The bottom line is the market hates uncertainty.
Oil market toppled head over heels with broader markets as the sum of all fear for oil market concerns centres around lockdown consternations. All the while, OPEC was doing their best to hold prices in check emphasizing the need for continued cooperation and vigilance in the face of the uncertain outlook.
The most worrying aspect for oil market concerns is the case of a brave new year giving way to the same old fear as the reimposition of worldwide lockdown to defend against the coronavirus’s mutant strain will pose the greatest near-term risk on the path back to oil demand normalcy.
If OPEC+ can avoid internal dissent signs, I think the decision to add 500kb/d in February will have a limited impact on the oil price. Far more important for oil will be news flow relating to the COVID-19 vaccine rollout, stimulus measures being considered by various governments, and how quickly we can get on the path back to normal oil demand levels via the vaccine rollouts.
Risk-off sentiment in Forex markets
Georgia’s Senate runoff has precipitated risk-off behaviour in the FX markets, potentially lending the USD more safe-haven strength.
At the end of the day, it matters little if Democrats or Republicans control the Senate as either outcome will leave the dollar brittle as the twin deficits are not going away any time soon. And that weight will eventually fracture the dollar unless US trade swings are more outwardly favourable. The Georgia election may pose a short-term speedbump but will unlikely change the 2021 trend.
The Euro is off overnight highs constrained by COVID-19 related concerns and US political developments.
USDCNH fell below the closely watched 6.50 level while the dollar is finding some interim support around 6.45.
The Malaysian Ringgit stumbled a bit overnight as Lockdown concerns weighed on the energy complex, which is getting complicated by a slower distribution of the vaccine than originally hoped.
I think EURUSD chops around for a bit and then releases higher to trade above 1.2500 by month-end.
Gold shines again
Gold is holding on to its sensational start to the year gains despite the US dollar attracting safe-haven demand. However, more favourably for the currency of last resort is that inflation expectations are bubbling over as the vaccine rollout is providing a sizable anticipated inflationary bounce to the economic recovery this year.
The bullish seasonality for gold in January has been one of the strongest across precious metals and the G10 space over the past five years. I expect the market to quickly try to price that over the week, with room for discussion after the seasonally move higher is reached.
Additional things to look at are the Georgia Senate elections runoffs, and a potentially increased fiscal spending outlook for the US.