Asia Market: Sound of more stimulus is music to the market's ears

Market highlights 

• With market fear gauges like the VIX falling there’s less urgency to de-risk
• OPEC+ members seem to be taking their commitment to output cuts to the heart
• FX price action broadly continues to normalize from last week's big short squeeze
• Silver in the eyes of social media investors
• Gold caught between positive stimulus momentum but weighted down by its old foe: the USD

Markets

While some investors are still worried about the systematic risk and "tip of the iceberg" scenario amid the potential fallout from last week’s retail onslaught and what paper losses could be lurking below the surface, US equities still recovered attractively on Monday with the S&P up 1¾% heading into the close, with gains in Europe as well. Helping sentiment at both the systematic risk and structural market-levels, the VIX fell 3.45pts with retail investors less active in equities, turning their attention instead to silver which lifted to an 8-year high overnight. US10Y yields little changed.

US equity markets have had a much less hectic and voluminous start to the week than anticipated by some, the latter possibly due to northeast US snowstorms playing a role, but with the market fear gauges like the VIX falling there’s less urgency to de-risk and folks felt more comfortable adding with volatility falling.

Of course, the sound of more stimulus, which tends to raise all boats, was music to the market's ears. President Biden has invited ten moderate Republicans to a meeting – set to take place as this daily is scheduled to hit your inbox – to discuss the two sides' competing stimulus packages. The US president has indicated a strong preference for bipartisanship on the deal, so watch for headlines. And dancing to the stimulus beat, tech is trading well today – mostly thanks to mega-cap tech names which are well in the green on average.

This week's talks in Washington DC should clarify the Biden administration’s route to deliver more fiscal stimulus. The President has proposed USD1.9 trn, and over the weekend, a group of 10 Republicans countered with an offer of USD600 bn. While the Biden administration is keen to do something bipartisan, Democratic control of the Senate gives it some freedom to act alone.

In what could be an essential signal that something big will happen, the Biden administration already seems to be upping the pressure on one of the key Democratic senators, Joe Manchin of West Virginia. Last week, VP Kamala Harris gave an exclusive interview to a local TV station in West Virginia touting the importance of ARP – the TV station even noted how unusual it was for the White House to get in touch with them.

Of course, "bigger" is always better when it comes to stimulus and stock market concerns. Still, with worries over new virus variants possibly leading to lengthier mobility restrictions to allow the medical community to better monitor vaccine efficacy on the ground, any stimulus big or small will come at a most welcome time for families that make rent, and one in four small businesses are closing permanently or have already closed.

The recent retail market flummoxes amid the unwind of popular hedge funds’ "short and long" positions triggered by a sizable spike in market volatility seems to be ebbing. The cross-asset spillover of the positioning contagion chill has been somewhat limited so far. Rates have remained close to post-crisis highs, and energy commodity prices barely moved supported by shrinking supply.

Since November investors have priced in an improving macro backdrop following the announcements of Covid-19 vaccines, supported by the expectation of massive US stimulus support in the order of 1 trn plus. And while market positioning and concentration risk is a worry with hedge fund leverage ratios significantly elevated, the most comforting blanket for investors is that the macro outlook has not changed materially in recent weeks.   

Oil Markets

The critical takeaway from yesterday's oil market recovery rally is that OPEC+ members seem to be taking their commitment to output cuts to the heart. And having OPEC+ singing from the same hymn page is music to every oil trader's ears. And with the JMMC unlikely to signal any need to rock the boat, price planks are all in place with the street awaiting word on the US stimulus deal for the next bullish impulse.

With the week dominated on the supply headline front with JMMC on tap, OPEC+ didn't disappoint as the production group's compliance level turned more than a few oil trader heads on a swivel overnight. Oil rallied as OPEC+ production compliance, ringing in at 99%, helped lift prices even in the face of a stronger USD. Demand in the physical market has been the driver of a strong front of the curve.

With immunization uncertainty due to new Covid-19 variants and rising global infection numbers continually vying for attention with vaccine deployment updates, the drivers of the recent deficit – both lower supply and higher demand levels – are very comforting signs and suggest downside risk remains limited unless there’s a material change in expectations for the duration of the pandemic's impact on demand.

Currency Markets

Equities are up, the dollar is up, commodities are up and EM mixed. Price action broadly continues to normalize from last week's big short squeeze, while idiosyncratic assets are still being flocked by retail speculators.

The USD is stronger this morning despite the generally upbeat tone evident in global equity markets. Some of the stock market strength is an echo of the retail market's latest target for collective enthusiasm, with mining shares rising on the back of silver's gains.

While it's most apparent why the US dollar is stronger vs the EURO, it’s much less clear against the high-risk beta. Perhaps the US strength may stem from the market selling local currencies to buy XAG, XAU so the USD then become a wash trade, getting accepted relatively well across G10 FX while weaker against the non-fiat alternatives. My colleagues on the ground tell me silver eagle coins are flying off the shelf, as are wafers and bars, suggesting the USD’s printed by the Fed and paid out by the Treasury in the US throughout the past year's stimulus packages are getting put to fair use.

With the precious metal’s frenzied retail demand expected to fizzle out, we could see a better spring in the step to risk beta currencies like the Aussie dollar via the US stimulus feedback loop.

EURUSD has pushed lower and may be eyeing a fresh challenge of support at 1.2050. The Euro fell under some pressure after Germany’s December retail sales fell worse than expected, accentuating the growth differential which now sees FX traders anticipating a stronger US near term economy versus the Eurozone which lends itself to trading the Euro from your ledger's short side.

The ringgit has been mired in range trade proclivities as the US dollar continued to strengthen even in the face of improving risk sentiment. With oil prices stabilizing again above Brent $56 due to OPEC’s unwavering production compliance commitment, it should offer up some festive food for thought for today's ringgit traders. 

Precious Metals

Gold

Gold is caught between the US stimulus's positive momentum but weighted down by its old foe, a strong US dollar. I suspect range trading biases to play out with most gold views predicated on a weaker US dollar and higher inflation. And with the retail frenzy on silver expected to fizzle, gold will return to being tethered at the hip of the US dollar.

Silver

Silver prices are rising but are doing so in the absence of any noticeable change in the underlying fundamentals or macroeconomic development. Instead, silver has been targeted by social media groups in a similar way that GameStop was targeted on the equity markets.

The attack looks to have fallen squarely on the EFP markets. On the IMM COTR data, the opportunity for a "short squeeze" does not appear to exist in the way it did for GameStop as most big trading shops appear positively disposed to silver. Effectively the “new kids on the block" are not "short position stop hunting". Without a fundamental driver, this implies the recent push higher could fizzle out.