Milestones Galore

Market highlights:

• S&P heads for record high as Dow Jones hits its own symbolic milestone
• Investors elated by vaccine news and revelling in the drop in political existential risk premium
• Changing oil narrative triggers all-encompassing risk rally and energy EFT investors go on a buying binge
• USD falls on the downside surprise of November consumer confidence data
• Expectations of 2021 vaccine deployment likely closes the lid on gold upside

U.S. equities were stronger on Tuesday, the S&P up one and a half percent and on track for a record high heading into the close. A symbolic milestone for the Dow Jones index as well, breaking through 30,000. Sentiment remains underpinned by the trio of successful vaccine trials announced in recent weeks, boosted by the US President Trump’s decision after the close on Tuesday to co-operate with a transition of power to President-elect Biden. US10Y yields were up 3bps to 0.88% and oil was up 4.2%, with both Brent and WTI contracts breaking through their post-March range.

Thanks to the multiple vaccines in the pipeline, “Joy to the World” is ringing in earlier than expected as global investors are elated by the vaccine news while simultaneously reveling in the drop in political existential risk premium, knowing the finishing touches on the US election process will not devolve into mobocracy as risk remains on the forefoot following the US General Services Administration’s acknowledgment that Joe Biden can start his formal transition to the White House.

Oil things considered

There’s heavy focus on the energy sector these days, providing a keen signpost that the world might return to normal faster than expected. Apart from providing much-needed protection for the most vulnerable, the vaccine also gives governments political wiggle room to pull back from continued lockdowns. And this narrative continues to work its way through the oil markets.

The Biden transition, positive vaccine news and Janet Yellen reportedly being Biden’s pick for Treasury Secretary triggered an all-encompassing risk rally and lit a fire under energy EFT investors who have gone on a buying binge with WTI prices marching their way to post-lockdown Nirvana heights (+WTI45). This week XLE (energy sector SPDR Fund) has seen some of its largest buys since early March as inflows into the ETF rang in a positive chime for the eleventh consecutive day.

Oil investors are rightly jumping for joy as the AstraZeneca delivery is the real deal and a game-changing panacea and means most of the developed world will be able to immunize its most at-risk population by the spring, and likely the entire community by mid-year. 

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 gasoline demand in the rest of the world remains depressed.

Expectations for U.S. gasoline demand for this week have improved. Petroleum analyst GasBuddy sees an increase of 10% week-on-week due to the Thanksgiving holiday. RBOB is up over 4.5% today.

Oil, OPEC & API

And while the immunized future looks bright for oil markets, oil traders were provided a present-day reminder why the OPEC quota extension will be the key to bridging the gap between the present-day COVID infused environment, as the vaccine rollouts come after the American Petroleum Institute reported a bearish build to the consensus in crude oil inventories of 3.8 million barrels for the week ending November 20.

While bearish on the surface, the inventory report does bullishly suggest that OPEC will continue to rebalance the oil market and deliver a three-month extension, which is the market’s base case scenario and is largely priced into the oil market.

But it’s the trifecta of galore that saw oil prices scale the post lockdown heights. Indeed, the markets seem to be charging ahead, betting on the bullish trifecta of early vaccine rollouts, OPEC quota extension, and a weaker USD.

Indeed, the energy sector vaccine rally has caught investors off guard, and there are signs of short energy position pain unwind; you just need to look at energy ETFs – XOP (SPDR S&P Oil & Gas E&P EDF) and XLE (energy sector SPDR fund).

The fact that energy rallies this hard every time there’s vaccine news continues to highlight just how underweight investors are, with the last three Mondays seeing the XLE/XOP outperforming the S&P by +12.86%/+12.74%, +5.27%/+4.35% and +6.43%/+8.26%. And, apparently, the long-only oil exposure funds haven’t even gotten into the game yet. I suspect oil prices will need to move a bit higher before the long-only community returns in earnest, but the way Brent is trading these days, we might even hit the mystical $50 level in early December post-OPEC+ meeting, if all goes well.

As we count down to the meeting of OPEC on November 30th, 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.

Forex Markets

The USD fell on the downside surprise in US November consumer confidence data at 96.1 vs. 98 surveys (though the prior was revised higher from 100.9 to 101.4) and consistent with the downside surprise in the University of Michigan survey earlier this month and the downside miss in retail sales, though that was for the October observation period. Notably, though, oil is having a good run today and has broken above the August/September highs, which may serve as the more important cue than the consumer confidence release from a reflationary-impulse perspective.

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.

Risk appetite flourishing post-AstraZeneca’s vaccine news, which offers a game-changing panacea for global mobility while getting a further lift from the initiation of US President-elect Joe Biden’s formal transition.

Equities are firmer while the USD is softer against G10 currencies, including the JPY. This seems to be getting dovetailed by Janet Yellen’s nomination as Treasury secretary also playing a factor, potentially raising expectations for lower for longer US interest rates.

Yellen and Powell are the new normal economic power brokers. They will aim to get the real economy to full employment. Both have learned from past mistakes. Exceptionally easy financial conditions will prevail for much longer than usual. Markets will be encouraged and incentivized to take more and more risk. Eventually, there will be a price to pay – but worry about that another day.

The Malaysian Ringgit 

As an economy dependent on a large oil export quotient, the ringgit has an ace up its sleeve this week as oil prices are soaring ahead of the OPEC+ meeting as the bullish trifecta early vaccine rollouts, OPEC quota extension, and a weaker USD should see the ringgit trade favourably. However, the pair could mark time ahead of the key domestic CPI release today.

Gold Markets

As energy ETF flourishes, gold ETF investors are running for the exits, supporting the notion there are much better trades for the reflationary bounce than gold.

The improved expectation for material vaccine deployment in 2021 has likely closed the door on the gold upside. And given the heft of ETF positions, especially the massive accumulation since the beginning of this year, there’s definite scope for a deluge of ETF unwinds. So, look for a massive clear out again on a break of the psychological $1,800.

Gold fell and hit its lowest level since July. It’s much of the same – transfer of ownership continues into stable allocation – with no huge clips dealing with Asian banks providing they offer during Shanghai Gold Exchange hours; SGE has widened again to a USD20+ discount.

The $1,800 level inevitably provides the gravitational pull with 950k oz in open interest within the $1,800 GCZ Puts yesterday, 650k oz on the calls with $1,797 spot lurking below as 200-day moving average support.

The gold rout continues as investors embrace vaccine news. The break of USD1,800/oz support may take prices near USD1,750/oz as surging investor optimism due to promising Covid-19 vaccines has undermined gold and silver.

For much of the year, increased risk-off sentiment sent capital into US Treasuries, which pumped up the USD and weakened gold. Conversely, increases in risk-on appetite sent money into stocks and less so to Treasuries, which often undermined the USD and tended to boost gold. Thus, gold often moved with equities.

These trade winds could be shifting; equities have charged higher recently while gold and silver have plummeted. A weaker USD has been of no help to gold and it’s quite likely that a more traditional inverse gold/equities relationship is being re-established once again. A risk-on mood cannot be counted on to boost gold, simply because it may weaken the USD – at least not in the context of a vaccine rally.

Gold will continue to be undermined by the commanding macro theme related to a vaccine recovery and the reduced risks associated with central bank debt monetization or the pursuit of quasi-modern monetary theory. This suggests the vaccine narrative has poked more than a few holes in the currency debasement story. And while the US dollar should likely weaken as the global economy comes back to life and will offer gold a modicum of support, nevertheless with the base structures (MMT and C.B. debt monetization) that supported gold on the way up from 1500 becoming less of a factor, gold’s luster could erode with every successful deployment of the vaccine.