Asia wrap: Markets may struggle to push higher in short-term (a more somber view from my world)

Markets paused for breath in Asia after yesterday's global 'melt-up,' which saw US indices (RTY made fresh all-time highs) and macro assets like copper touch multi-year highs. The narrative remains the same: vaccine optimism (and the positive implications for growth in 2021), ample central bank liquidity, and a Biden presidency (along with 'deficit dove' Yellen as Treasury Secretary), which should continue to normalize trade relations to some degree. 

Unsurprisingly, cross-asset price action continues to support a rotation into the value end of the equity market, with the aggressive reach for risk seen in the past few sessions suggesting a rush to re-pivot portfolios for an expected sharp rebound in growth next year.

Despite the sharp moves higher yesterday, the flow data suggests we finished the day marginally better for sale in Europe, on what was a more cautious flow picture. 

In the short term, markets may struggle to push on meaningfully from here ahead of tomorrow's Thanksgiving holiday in the US, with a further uplift in month-end selling pressure now expected after yesterday's significant equity move relative to bonds. Of course, year-end considerations need to be factored in as investors will turn profit and loss defensive during December. 

Still, the path of least resistance is higher in the medium term, with the buy-the-dip mentality very much in play in cyclicals. The amount of fretting for client conversations around the moves over the last few days suggests that investors are not positioned for this squeeze higher. And all this is without any real rotation as yet out of tech or - perhaps more potentially out of bonds occurring.

Still, It looks like a lot of correction calling is happening right now. There are different schools of thought. But the popular macro view emerging is that a vaccine and improved mobility is in the price; a split Congress will hamper US President-elect Biden; the Fed is out of influence; growth stocks are stretched, and the conditions are against value, and pre-existing structural/temporal constraints will bind. The correction is overdue, and the entire post-election rally is undeserved.

An interesting Quant view comes from UBS US Equity Derivatives Strategist Rebecca Cheong, who has her eyes on next week and is looking for a pullback of around 10%. Answer 2: in about five days. Batton down the hatches !!

Forex

The Euro 

Dow Jones trading at 30'000 for the first time in history! Arguing with the bullish sentiment is more than difficult at the moment. EURUSD at the highest level since the summer, and once again, the excitement has gone moonshot. But we had a similar situation earlier in the week before US PMI data marked an abrupt end to the rally. Thanksgiving tomorrow and month-end rebalancing could make it jumpier in the short term as well. So, sentiment can turn in a heartbeat, and stops might be kept tight. Overall buy the dip might prevail for now.

EUR/CHF is finally showing signs of life. The prospect of carry trades becomes interesting because of the latest vaccine developments and the decline in European virus cases. The market is starting to look ahead for 2021 trades. But the short CHF is starting to attractive as the next funding currency.

The month's end is approaching, equities have had some big moves this month, and the market might be thinner than usual due to the US holiday.

And German Chancellor Merkel and the heads of the country's 16 states meet today to discuss extending the 'lockdown light' until the end of the year because the number of daily new COVID-19 infections remains too high. Several German states will close schools early, with Bavaria, for example, bringing forward the date to Dec. 18, from Dec. 22. Other countries are considering extending the holiday through to January.

Oil markets 

Since early March, oil is at its highest level with vaccine-driven optimism and signs that an orderly transition of power in the US is underway, helping the demand outlook. Positive comments on the state of the Chinese economy by Premier Li are also supportive. 

Oil hit its highest level since March, with WTI touching $45.20 and Brent $48.03. The front three expiries of the Brent curve settled in backwardation on Monday. The Jan21 has continued to trade over Feb21 on Tuesday. Demand from Asia has been the catalyst for the increased demand,

But it is hard not to get concerned about how quickly oil has priced in the recent good news, and Hedge Funds have flipped bear to bull on the move from sub-Brent $45 to + $48, including expectations that OPEC will extend current production cuts by 3-6 months. It remains the market's base case that an extension will be announced. Still, the oil will be susceptible in the near-term to any outcome seen as indicating that the OPEC tensions mentioned in recent press reports are real and may threaten the implementation of cuts during what remains an uncertain period for oil.

OPEC holds its 180th Meeting of the Conference on 30-Nov and 12th OPEC and non-OPEC Ministerial Meeting on Dec. 1. Market expectation is that the current production quotas due to rise by 2Mbd on 1 Jan-21 will be retained, likely for another three months. Indeed, this should be sufficient to bridge a challenging northern hemisphere winter from a Covid-19 perspective to potential improvements in economic activity and mobility coming with the rollout of vaccines.

It seems logical that this will be the production club's final effort to protect oil markets from a collective perspective. Internal tensions and domestic pressures have been emerging both from expected sources such as Iraq and Nigeria. From previously core members such as UAE – unsurprising given the combination of low oil price and production volumes, Saudi and Russia have strongarmed discipline and consensus. Still, something more delicately diplomatic may be needed to assuage members' concerns to present a unified message to the market, especially as the organization faces longer-term existential questions in the context of the transition from fossil fuels to green energy.