Asia Market: Stimulus floats all boats

Market highlights 

• No stimulus breakthrough, but no setbacks, has net effect of being viewed as good news
• Oil settles at its highest level since February
• Risk assets put on strong performance as a powerful stimulus tide floats all boats
• Close but no cigar for gold as hopes for a breach of the $1,900 level were dashed

Markets

US equities were stronger Thursday, the S&P up 0.5% heading into the close and on track for a fresh record. There were no stimulus breakthroughs, but nor were there setbacks so, as always when it comes to the political morass in Washington, no news is being viewed as good news on that front.

It was a miss for Philly Fed, down 15.1pts in December, and initial jobless claims rose 23k to 885k last week – the highest since mid-August. The latter is likely to weigh significantly on expectations for December payrolls. But in the case of bad news is good, the weak labor market data stoked optimism that Congressional leaders will finalize another round of stimulus before holiday-wide lockdowns could shutter the "Last Chance Stimulus Saloon" on Friday.

Bonds are little changed, despite the rally in equities highlighting that the recent string of central bank outcomes (FED, ECB, BOE) keeps a tight lid on financial conditions to clear the way for risky assets to push higher the USD to move lower. 

The Fed yesterday disappointed on duration extension, but more than made up for it on forwarding guidance which strengthened from time based to outcome based. At the same time, participants had an underlying suspicion the Fed could have turned more notably hawkish in a tone that didn’t quite materialize.

Helping European equities outperform yesterday was the announcement that the EU drug regulator would decide on the Pfizer vaccine on Dec 21, with distribution likely to come before the new year.

Oil Markets

Oil has settled at its highest level since February as US lawmakers are putting the finishing touches on a Covid relief deal that might provide a much-needed mobility footbridge and boost near-term fuel demand ahead of a wider distribution of the Covid-19 vaccine. That’s notwithstanding the continued problems the northern hemisphere is experiencing with the combination of winter and the Covid-19 virus.

With all boats rising on the stimulus wave, the US benchmark pumped higher in tandem with broader markets as the omnipresent weak US labor market scrim stirred enthusiasm that another stimulus deal is on the way.

The stimulus package is unquestionably one of the key drivers pushing the oil market higher as the whole dollar-denominated commodity market is repricing higher thanks to frothy risk markets after the FOMC reaffirmed that policy is going nowhere for a long time. So, the combination of low for longer rates and the anticipated US stimulus deal offered up support for broader risk markets appetite, which has proven enough to push the USD weaker. 

And the currency passthrough effect provides spot and forward price discounts to Asia buyers. Both China and India are splurging to that currency advantage as India's refinery demand is roofing and China continues to fill storage tanks.

• Oil traded higher today with the help of a US dollar at 2½ year lows and continuing optimism for an imminent stimulus deal in the US. Yesterday's benign oil inventory report also contributed.
• Asian buying continues to attract barrels from Russia, the Middle East and North America. The futures market's strength is replicated in the physical market, where various grades prices have risen. With the Arb widening in the last few weeks, demands of physical Brent has suffered over American grades.
• The front of the Brent curve turned back to contango today, resembling more the WTI futures curve. However, the Brent curve has flattened somewhat. The Dec21/Dec21 spread gives a clear picture of the difference in the shape of the two grades' forward curve, trading at $0.77 for Brent and $1.36 for WTI.
• The gasoline crack has moved above $9 a barrel and the 3.2.1. crack spread broke above $11 a barrel today, the highest since August.

This year's negative year-on-year base effect will most certainly give way to Q1 exuberance if these underlying metrics continue to improve – especially the gasoline crack. 

Currency Markets

G-10

Overall risk assets have put on strong performance overnight as the powerful stimulus tides float all boats, so it seems. I’m still amazed at how much we managed to read in the Fed that offered up little in the way of a holiday stocking stuffer surprise.

While the Fed may not have sharpened its dovish tone at yesterday's FOMC, it reaffirmed that policy is going nowhere for a long time, hinting that the market is still unable to stand on its own two feet without fiscal policy inputs for the foreseeable future. The combination of low for longer rates and the anticipated US stimulus deal offered up support for risk appetite, which has proven enough to push the USD weaker. Still, ultimately, it’s far too early to be worried about when the US central bank policy pivots and interrupts the US dollar downswing. And I think the moral of this story is this move continues into 2021. Stay short dollars, especially against all the positive growth currencies.

The euro is hitting fresh highs. Eurozone December PMIs, released this week, beat expectations. Strong inflationary pressures in supply chains were remarkable as backyards and industrial stockyards were very busy despite lockdowns, with the EURO starting to move higher on its own volition rather than just coat-tailing a weaker dollar Asia. This augers well for the single currency on the back of a vaccine-driven recovery in the EU and growth proxies, like the PMI data, will propel the EURO higher still.

In the never-ending Brexit saga, and after yearly chart-topping gains, there’s been a slight pullback on GBP as Brexit negotiations remain tense. In a tweet, EU Commission President von der Leyen "welcomed substantial progress on many issues," but also "big differences remain to be bridged, in particular on fisheries. Bridging them will be very challenging." For his part, UK PM Johnson noted that trade talks are in a "serious situation." Negotiations continue on Friday.

Asia FX 

The current bout of USD weakness has left it trading at a two-and-a-half-year low against major DM and EM currencies, and the greenback is on the precipice of further declines. One lesson history tells us from previous episodes of US dollar weakness is that you don’t want to be short EM stocks – and especially EM FX risk for that matter – which tends to moonshot if a cyclical or structural dollar weakening event comes to fruition. 

With the easing of domestic political risk with the budget passage, surging energy prices and the Fed holding interest rates lower for longer, it’s hard not to think the best is yet to come for the MYR as oil prices should continue to press higher in catch up mode to other commodity peers. 

And at the same time, the Fed policy supports pro-reflation trades that should push oil and other commodity prices higher. But the weaker US dollar should also open the door for more equity inflows into the Asia markets. So to suggest the stars are aligning for the commodity-sensitive regional currencies like the MYR and IDR could be the understatement of the year. 

But everything is flying off the shelf in Asia FX. Even my local unit, the Thai baht, climbed to the highest in almost a year as vaccine optimism offers an Alka Setzer moment for travel sectors, which comprise close to 25% of Thailand's GDP. 

Gold Markets

It was close but no cigar as hopes for a highly anticipated year-end breach of the technical and psychologically significant $1,900 level were dashed as bullish enthusiasm for all things bullion has temporarily given way to profit-taking and vaccine optimism; the EU drug regulator will decide on the Pfizer vaccine on Dec 21, with distribution likely to come before the new year.