Equity and oil market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi,
Despite the political rancour that has vexed market sentiment in recent days, US stocks edged higher overnight as investors are willing to look past the political big uglies to sunny days ahead. Expectations are building for additional and perhaps larger fiscal stimulus efforts as pandemic priorities remain the first order of business for the Biden administration.
All the while central bankers stay the easy money course, thankfully resurfacing the runway for lift-off which experienced a few policy pivot potholes this week.
More dovish Fed commentary this time from FOMC member Brainard suggested the economy is far away for our (FOMC) economic goal.
While on the other side of the pond and providing an offset to the political rancour building in Europe, a dovish tone as well from European Central Bank’s (ECB) Lagarde: “Any tightening at the moment would be very unwarranted”, and pre-emptive tightening could lead to “very serious risks” suggesting the market should not get too far ahead of themselves.
Of course, more stimulus means more borrowing. While the street has been in a bit of a taper tizzy simultaneously attempting to factor a Democratic Senate stimulus deluge inflationary effect into their forecasts, it’s telling that both Tuesday’s 10-year auction and Wednesday’s 30-year sale went well, even as markets are acutely aware of the prospects for much higher spending.
It suggests investors are willing to draw a tentative line in the sand expecting the FOMC to do the bulk of the heavy lifting if any excess supply mop-up duty is needed.
Stock market dips continue to be bought on the promise of brighter days ahead and what is now a dual policy put of both a monetary and fiscal backstop, making it ridiculously difficult for short selling strategies to execute and hence for equities to a selloff in earnest.
After all, there is nothing like good old policy stimulus balloons lifting markets to vaccine nirvana (herd immunity).
Oil rally comes to a halt
Oil market sizzling rally likely took a hiatus as the stronger dollar and the omnipresent gasoline supply overhang offset the evaporating US crude inventories capping both primary benchmarks under key psychological and technical inflexion points.
Even before the not so rosy gasoline read on the US Department of Energy (DOE) report, this gnawing temporal disconnect was weighing on market sentiment with spot miraculously trading better now than they were before the pandemic.
But this is the intentional results from OPEC+ supply discipline, which is the keystone anchor to fundamental deficits which are drawing on US inventories as compounded by Saudi Arabia already limiting supply to Asian refiners ahead of production cuts planned in February, signaling their commitment to the production cut.
This price boosting effect could be further amplified by Saudi Arabia’s unilateral cut of a further -1 mmb/d in February and March especially via pivot lower on the Covid-19 curve, speedier vaccine distributions even a larger than expected US stimulus impulse could do the trick.
With oil prices running ahead of many forecasts, it’s going to very interestingly how “the street” interprets the effects of the recent rise in crude prices through the lens of Shale. One would have to imagine there will be considerable head-scratching as to whether WTI near USD54 will prompt increased investment in US oil or whether a conservative financial strategy prevails.
Oil is still pricing in a great deal of optimism linked to the roll-out of Covid-19 vaccines, and any negative developments would prompt a sharp negative reaction.
Still, demand will gradually improve as more folks get vaccinated, and the supply side is under control thanks to OPEC+ and Saudi Arabia’s continued efforts.
Risks remain, but there appears to be a clearer path to oil upside with downside risks diminished.