US stocks are steadying following yesterday’s decline as investors remain optimistic that Biden will unveil a multi-trillion fiscal stimulus plan on Thursday, the Fed is still far away from tightening, and that vaccine rollouts have the world nearing the other side of COVID. Yesterday, Fed’s Bostic noted that a rate hike might be more in play in the second half of 2022, much sooner than Fed’s consensus view of raising at the end of 2023. If inflation rises too fast that could pose a problem, but we are still nowhere near that and tomorrow’s CPI data should ease concerns. Vaccine rollouts have been messy, but as more vaccines get regional approval, risk appetite is thriving as we get closer to the other side of COVID.
NFIB
The NFIB Small Business Optimism Index confirmed the December labor market weakness seen in last week’s nonfarm payroll report. The small business index plunged as expected given President Trump’s defeat (small businesses loved Trump) and all the stimulus uncertainty due to Georgia Senate runoff races, and rising lockdown risks that remained in December. Businesses had no idea we were going to see a Blue Wave and that vaccines targets would be boosted. Wall Street is looking beyond the NFIB’s headline index drop to 95.9 which brought it below the historical average of 98. Small businesses are expected to see more relief under a Biden administration and that should help the index rebound next month.
GBP
The British pound rallied against all of its major trading partners after BOE Governor Bailey signaled resistance to negative rates, while the central bank’s Broadbent indicated the economy is in better shape than it appeared. UK money markets have now shifted a 10bps interest rate cut to 0% from August to December.
The euro remains sluggish as risks for a double-dip recession remain elevated. German Chancellor Merkel noted that lockdowns could last another eight to ten weeks until early April.
Oil
Crude prices are following the broader move into risky assets today. It seems energy traders are just looking for a reason to buy as the macro outlook seems to be very positive once we get past these next few months. Earlier oil was boosted on a weaker dollar, but those declines have been kept in check.
Surprisingly, oil did not react much to Petro-Logistics report that showed OPEC+ cut compliance fell to 75% in December, the lowest levels since the group of producers agreed upon production cuts in May Even Saudi compliance dipped, down 10ppts to 92%, while non-OPEC fell 8ppts to 64%. This report obviously reflects positioning before last week’s tense meeting which delivered the Saudi surprise cut of 1 million bpd beyond its share OPEC+ cuts in February and March.
Given the rising COVID risks and potential lockdowns, WTI crude should struggle to rise beyond the low-to mid-$50s. Oil prices seemed unfazed after Germany warned they could need another eight to ten weeks of lockdowns.
Gold
Gold’s bottom could be in place as prices are rebounding despite rising Treasury yields. Dragging gold has been a dollar rebound that was supported by the benchmark 10-year Treasury yield, which is over 1.15%, steadily rising from 0.95% over the past five trading sessions. Gold was looking very vulnerable as excessive technical selling tentatively breached critical support levels.
Gold should see steady demand however as global COVID fears remain, a slow rollout of vaccines, and on expectations the Biden administration will be able to deliver more fiscal support as the economic data deteriorates. Gold should see some tentative resistance around the $1870 level given today’s light volumes.
Bitcoin
Bitcoin is stabilizing alongside other risky assets as the latest plunge has seemed to run its course. In the short-term, Bitcoin will likely take its queue from global equities and whether the promise of more stimulus will pump up financial markets.
The over 20% plunge has scared away some retail investors, but institutional players were prepared for Bitcoin’s latest volatility. Bitcoin could make an attempt back above the $40,000 level if the dollar rebound takes longer to formulate. An overcrowded bearish dollar trade at the start of the year probably still has to be unwound, so Bitcoin might not be in the clear just yet.
