International market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi,
Nerves about vaccine rollouts weighed on market sentiment and significant volatility among some stocks targeted by retail investors added to investor fluxomics.
Yes, the future looks bright, but the moment is hell.
It’s been a gruelling 24 hours as turmoil reigned over equity markets with reopening narratives getting pushed back well into Q2 due to messed up vaccination and rollout strategies. Adding to investor pain, there are worries around a subtle hawkish shift in policy from the People’s Bank of China (PBOC).
And to rub more salt in the wounds, macro markets went into complete flux mode on reports that European Central Bank (ECB) officials believe markets are underestimating the chances of a rate cut spurring desynchronized global growth fears.
Investors had been optimistically shooting for a spring break reopening hoping governments would start lifting restrictions on economic life once the most vulnerable 20-25% of the population are vaccinated.
At this stage of the rollout game, for now, it’s little more than a pipe dream. Delays in the rollout of Covid-19 vaccines, coupled with lingering lockdown measures, marked a malocchio of the markets worst held fears.
Vaccine distribution is the most crucial deliverable to get out of this mess.
And while the US stimulus debate is taking the second chair to the vaccine rollouts, a break in the bi-partisan impasse, or even by the reconciliation process couldn’t come at a more welcome time.
VAR meltdowns are the worst of all panic events
In a most unvirtuous circle, the risk-off panic became increasingly self-fulfilling as risk control mechanisms kicked in when early covering in consensus shorts, at massive losses mind you, then gave way to selling high flying technology longs from the Hedge Fund community in the main to cover margin calls triggering a cascading house of pain effect across broader markets.
We remain in a market dominated by risk-on risk-off proclivities and even more so as we reach peak vaccine impulse melding with incredibly uncertain economic outlook not to mention near the end of the fiscal runway.
Still, we are 100 % landlocked in a liquidity-driven environment where all boats rise with YTD performance of US equities and US dollar lower, all suggesting significant co-movement between risk-on asset classes.
So, a negative view on any one of these risk-on asset classes will almost inevitably also lead to negative opinions across the entire risk-on spectrum, including cyclical commodity prices like oil.
Any further headline disappointment, be it vaccine rollout or even US stimulus, could prompt further de-risking over the coming days despite the still-intact longer-term bull narrative.
I have been cautious on markets over the last week and remain so. It always feels horrible to be part of a broader camp looking for a more significant sell-off and it seems with everyone looking for an equity market pullback their wishes did come true.
But it won’t be easy to get back in the saddle with any conviction until the vaccine distribution mess gets sorted as it delays everyone plans for a brighter day.
While Recent COVID -19 news and snail-paced vaccine rollouts have been horrifyingly discouraging, the big picture does not change in terms of markets outlook. Namely, an unprecedented amount of monetary and fiscal stimulus, a structural shift towards much more spending, a potentially unmatched economic rebound — whether starting in Q2 or Q3 — and a reasonable chance of inflation for the first time in several decades.
Once the systematic correction gives way, things could brighten up again.
Little change from the US Fed
As the markets had widely expected, the Fed made very few changes to the statement. But for investors’ concerns, relevant messaging can be summed up as a single-issue event: no taper. Fed Chair Powell looks to have come with the express intention of conveying just that one message.
The sole reason for the massive balance sheet expansion —COVID-19 —will be mostly gone in 6-9 months. And since monetary policy works with long and varying lags, it is, or rather will soon be time for central bankers to consider policy normalisation.
Oil remains supported
In the face of risk-off Armageddon, oil prices, and thankfully for broader markets, remain well supported due to OPEC’s dogged determination to stay in damage control mode adjusting supply constraints to alleviate the projected oil demand level attrition in Q1.
Because stocks are in the midst VAR type meltdown oil prices aren’t necessarily as exposed to the market risk on risk-off proclivity around Game Stop and High Tech de grossing.
But oil prices do remain precariously perched and extremely sensitive to any news about snail-paced vaccine rollout.
Perhaps one factor that has been slightly unnoticed is the substantial rise in energy prices and cyclical commodity prices triggered by expectations of a hyper reflationary environment over the next 12 months and has resulted in a significant increase in market-based inflation expectations, where this unmistakable reflationary exuberance was getting expressed in FX.
The broad recovery in risk assets via oil prices since November has not only affected market-based inflation expectations but boosted every asset class on the street.
I think “risk markets” can thank their lucky stars that Saudi Arabia crystal ball outlook was clear as a whistle, and their proactive production cut measure buttressed investors from a more significant meltdown.