Asia Market: Stimulus and vaccine optimism give way to political wrangling

Market highlights 

• Jittery markets jangle as skittish investors zero in on lack of political development in Europe and the US
• Oil traders picked up the pieces after quickly vaccinating an inventory washout
• Lack of progress on the US fiscal front gives USD a chance to firm up

Markets

US equities fell Wednesday, the S&P sliding from slight gains at the open to be down 1% heading into the close. There was no breakthrough in stimulus talks after the White House issued a $916bn stimulus proposal late Tuesday, with key sticking points remaining much as they have been for weeks: liability protections for businesses (sought by Republicans, though there ahs been some recent willingness to negotiate) and funding for state and local governments (sought by Democrats). US10Y yields rose 2bps to 0.94%.

Similarly, there have been no Brexit breakthroughs. PM Johnson is in the final throes of an apparent make or break discussion with EU President von der Leyen in Brussels. Providing the negative headline for sterling overnight, German Chancellor Merkel indicated that the EU would accept a no-deal outcome if the agreement could not be reached. Still, when it comes to deadlines and Brexit, they’re seemingly meant to be broken, so it’s no surprise that talks have been extended to Sunday.

It was a beat on the US JOLTs job openings, but data is for October therefore precede the more recent Covid spike. FX traders now train eyes and ears on the ECB.

Keep in mind: we’re in a stalemate, not checkmate mode.

Stock Markets 

Stimulus and vaccine optimism gave way to political wrangling on both sides of the pond overnight. Jittery markets jangled as skittish investors zeroed in on the lack of political development in Europe and the US on Wednesday, as skepticism over the UK's inability to secure the last chance Brexit deal has yet again drained sterling's optimism and gridlocked congressional dealmakers on fiscal stimulus in the US rattled the stock market.

With investors peering down the stimulus holiday wishing well, US stocks remain perilously perched. The hope is that Congress would by now have reached an agreement on a spending package to brace and bridge the gap for American households and businesses to the point when the majority of the population gets inoculated.

Sadly, the fiscal fiasco has once again turned into a bit of a political blame game. McConnell says the Democrats are moving the goalposts in the aid bill and that Schumer and Pelosi are brushing off GOP aid proposals. It’s a sad state of affairs when it comes to the state of US politics. The numbers are aligned for really the first time. It’s now the composition where the sticking points remain, and it's pure politics right now.

McConnel needs the Trump base for the Georgia runoff so he has moved from $500bn to $916bn, while for the Democrats it would seem that their face-saving in a concession would be to say that this will be a short-term deal ahead of a larger package once Biden is in office. Again, to the extent that it comes down to Trump, it’s difficult to say here what his real motivations may be in this lame-duck session – how badly he wants to get a deal done versus being OK with it being the fault of the Democrats if one doesn’t get done. Again, it’s pure politics.

Stocks have not fallen too far out of bed as the market knows that stimulus is coming in some form. However, they’re not sure of the composition and timing, and that’s where the balance of angst sits. Vaccines brighten the medium-term outlook, but what about us over the months to come, the Main Street asks?

Also, there’s enough positive vaccine feeling to keep the market in check. The World Health Organization said jumps in weekly Covid-19 cases in the United States and Canada are particularly problematic as winter approaches. But the US is drawing closer to vaccine approval. FDA approval could come as soon as Friday or Saturday with the first US injections happening on Sunday or Monday, said Moncef Slaoui, chief adviser to the Trump administration on vaccine development.

As far as Brexit, well, it’s gone on for more than four years with numerous squabbles. Yet, it comes down to eleventh-hour negotiations as investors keep asking themselves, should we have expected anything different? Probably not.

Sterling is still the best fear index for gauging investor confidence, and although it has been banging around quite a bit, even opening in Asia at 1.3350, the street is still holding on to a high level of optimism. Deadlines have come and gone and it appears the market will be tolerant of more slippage on the deal's timeline, and I suspect even into 2021. Yesterday's sharp bounce back in GBP shows this attitude will likely sustain a "buy on dip" approach when headlines flick the switch.

Oil Markets

• Huge 15.2mb build in crude stocks reverses downtrend; spike in net crude imports are the main cause 
• 9mb build in distillate and gasoline; some of this is seasonal as refineries return from maintenance season 
• Gasoline demand continues to soften; implied gasoline demand below 8mbd  

Oil traders picked up the pieces after quickly vaccinating an inventory washout.

Oil traded higher as soon as London came in after reports of an explosion at two oil wells in Iraq. While the field does not produce a critical amount, any oil facility attack typically makes the market nervous in a knee jerk fashion.

Meanwhile, the EIA stock report was a shockingly colossal miss. The market had been expecting a small draw in oil inventories and the 15+ million barrels build pushed oil down in a straight line. Gasoline and distillates were also very weak with throughput posting builds.

In short, higher imports, record declines in exports and deficient gasoline demand are what caused this surprise.

Considering how bearish the report was, the oil-price sell-off was limited. Optimism over the vaccine prevails and continues to limit any serious downside action. Eventually, oil retraced to positive territory before giving way and tracking falling US equities lower into the close.

Oil has moved to the top of the recent trading range following the supportive outcome of last week's OPEC+ meeting and positive vaccine news, and an optimistic view of the pace of the global economic recovery. Still, the sentiment will remain sensitive to any signals that the vaccine rollout could be longer than expected. Volatility is likely to stay high ahead of the next OPEC+ meeting in early January. While the recent rally leaves oil at risk of profit-taking into year-end, it’s unlikely the sell-off will drift too far from current base levels, as evidenced by the impressive rebound after a colossal miss on the inventory reports. 

Currency Markets

The Euro

On ECB day the non-consensus shorts are still hanging in there with risk sentiment trading "Off" on the Stimulus On-Stimulus Off barometer, and the Euro was largely nonreactive to suggestions of a breakthrough in EU budget discussions.

The lack of progress on the US fiscal front allowed the USD a chance to firm up.

If the street continues to make plaster casts of historical events, the 2017 EUR analog is not as glossy as it looks; EUR even outperformed global growth currencies like AUD in 2017. The EUR move was broad-based. This time, the EUR move is more about the unwind of the USD shortage,  thanks to Fed QE and much less about Merkel and Macron coming together on the recovery package. This information is not directly tradable, but it is food for thought, considering everyone is talking about historical precedents for the Euro.

The Ringgit

The lack of US stimulus breakthrough has helped the dollar gain some ground overnight while optimism over the FDA vaccine approval and subsequent rollout in the US is holding the oil market in check after a much larger than expected inventory build in the US. I expect the regional stock to trade unsettled on lack of progress in Brexit and a US stimulus.

But, overall, the vaccine developments and rollout throughout the world should help regional exporters and travel and leisure, which suggest the Ringgit should trade on steady footing.

The lack of US stimulus breakthrough has helped the dollar gain some ground overnight while optimism over the FDA vaccine approval and subsequent roll out in the US is holding the oil market in check after a much larger than expected inventory build in the US. So, a bit of an offset as far as the Ringgit is concerned.

Gold Markets

Gold was undercut by vaccine optimism; fiscal package stall and firm yields weigh negative.

The lack of progress on the US fiscal deal has allowed the US dollar to firm up and pressure gold. The next – and possibly more powerful – knockdown to gold and silver could come from growing optimism over a vaccine.

There’s enough positive vaccine feelgood to keep gold and silver pressured in the near-term. The FDA approval could come as soon as Friday or Saturday, with the first US injections happening on Sunday or Monday, said Moncef Slaoui, chief adviser to the Trump administration on vaccine development. The vaccine may continue to undermine gold and silver's "safe haven" demand as it’s rolled out. Still, if we get a pre-holiday Christmas deal, fortune favours gold.