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Stephen Innes
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Market highlights:

  • Inoculated from iffy data this week, investors revel in the vaccine pipeline
  • Oil at its highest level since early March, boosted by vaccine-driven optimism and signs of an orderly transition of power in the US
  • Brexit deadline looms as potentially the biggest wave of profit-taking on sterling the world might ever see
  • Medium-term outlook for the dollar is about as bearish as it gets
  • Silver linings hard to come by for gold

Investors are still inoculated from iffy data this week and are reveling in the vaccine pipeline. However, they might need to be concerned with more days like this as the virus hits the economy faster than the vaccines roll-out.

US equities moved sideways Wednesday, the S&P little changed heading into the close (and likely a much needed hiatus after the record close the day prior). US 10Y yields were also little changed. The most notable price action was a further extension in oil prices that rose 1.8%.

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Rotation into the reopen trade has taken a breather with Momentum/Growth/At Home back in the driver’s seat. There’s been a bit more profit-taking and some fresh shorts on the broader matrix’s Cyclical and Value side.

The shift seems to be driven by uncertain data out of the US sending equities into mild profit-taking mode, though it’s not like the data was that bad. Still, the two primary low lights of weakness (initial claims and personal income) feed into market concerns that the pent-up bounce seen earlier in the year will go into reverse as virus cases pick up and fiscal support ebbs.

Investors don’t seem to care too much about this week’s data as they’re still basking in the glow of the positive vaccine news. However, as we start the final monthly lap towards year-end where investors will turn ultra PnL defensive, you might need to be concerned over more data release days like this as the virus hits the economy faster than the vaccine roll-out evolves. Indeed, many event risks can go sideways before the vaccines arrive, at which point all lights will signal green for risk-on.

Still, similar to last week, investor confidence in US equities has been holding up. The relentless and enduring bid from retail, combined with corporate buybacks and institutional short covering, has been enough to offset the expected pension selling so far. It will be interesting to see if the leaderboard holds over the Thanksgiving holiday, or if pension rotation selling finally takes over as we head for year-end.

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Oil

Oil traded higher on Wednesday in a very tight range until the rally midday NY; WTI attempted a clean push through $46, and Brent printed through $49 before retracing some.

Oil is at its highest level since early March, 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.

The inventory numbers released earlier in the NY session helped push the market higher, with the EIA figures more bullish than the previous days’ API estimates and bullish to consensus.

As we count down to OPEC’s meeting on Nov. 30, the Axi Expert Series is pleased to welcome Henning Gloystein, Director of Energy, Climate & Resources at Eurasia Group, to discuss his views and insights in what’s an important week for oil markets.

Watch now

Forex: All focus on Brexit and Energy

The next week could be decisive for Brexit, though there’s no hard deadline except for the end of the transition period on December 31, which cannot be moved. From my understanding, most of the agreement’s legal text seems ready, and chief negotiators Frost and Barnier will likely present what they have to their political headmasters next week. The question then will be whether the UK and EU leaders will agree on the remaining, most difficult ‘brackets.’ Markets seem to broadly anticipate a deal, suggesting that the knee-jerk market reaction could finally offer up the opportunity for the biggest wave of profit-taking on sterling the world might ever see.

The energy sector is going full out bonkers, the oil market rally is a huge positive tell, and it screams increasing optimism around the global 2021 outlook. Such an outcome would be consistent with the USD downside.

S&P Energy is still 15% lower than it was in June and down 35% on the year. Energy is always a favorite value and means reversion play. And with the month-end corporate dollar buying getting soaked up easily overnight in NY, the USD dollar downside should start to open up a bit more into year-end, provided energy holds an even keel and Brexit talks don’t fall off the table.

The medium-term outlook for the dollar is about as bearish as one could get. The analog to the 2009 post-GFC recovery remains the obvious historical comparisons. China’s credit creation leading to a V-shaped global recovery triggering reallocation of assets abroad from an overweight US position is about as clear a whistle to sell dollar signal as one could get.

For context, the Bloomberg Dollar Spot Index (BBDXY) dropped 16.5% off the highs in 2009 alone, while the dollar is only 12% off the highs this year, despite an arguably worse outlook. The surprisingly high efficacy of vaccines brings forward the timing of the full global recovery and, with it, equity inflows to the rest of the world. Also, the twin deficits have historically led to dollar declines, and the combination of a Yellen Treasury/inflation-targeting Powell reinforces the dollar downtrend.

Gold

It’s difficult to find a silver lining amid all the bearish clouds as gold prices continue to defend the key $1,800 level. It’s much of the same overnight, with transfer of ownership continuing into stronger hands. But with the inability to even reclaim $1,825, it’s hard to argue the downtrend does not remain in the play.

The positive correlation between gold and the SPX since March flipped after Pfizer’s vaccine announcement on November 9, while negative real yields are not having a positive effect on the precious metal. A transition from disinflationary to inflationary support for gold could take time and ultimately leaves prices vulnerable to more profit-taking and the establishment of more shorts in the near-term.

For a look at all of today’s economic events, check out our economic calendar.
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