Nice month for the beaten-down sectors! Mega Russell 2000 outperformance tends to come at moments of high volatility, sector rotation, and uncertainty. And it certainly has not disappointed post-vaccine
Meanwhile, the energy sector has gone fully mad crazy this year, rising, or falling 30% or more in 3 out of 11 months this year. Now that oil is on the ups which is the clearest signpost the street thinks a global economic heal is on the way, I have turned bearish on the USD for a one or two-week horizon. The supply/demand situation is about to turn dramatically in favor of stronger currencies and a weaker USD.
Still, It might be a good time to remind everyone that something that goes up and down 30% in a repetitive fashion is not necessarily the best asset to chase higher. Anyway, there are likely a few more upside dollars left in the oil market's tank before this rally fizzles.
Currency Markets
Everyone talks about how the medium-term outlook for the dollar is about as bearish as one could get. It does not feel like the usual analyst's lip service either; traders are talking about this. 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 as a whistle 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.
There has been huge corporate USD demand before Thanksgiving, causing the dollar to rip higher earlier in the week on what is normally a nothing data point for FX markets (i.e., the strong US PMI). Now, the USD demand has been fully stopped up, and there is about to be a torrential downpour of dollar supply for month-end, It is time to pick your favorite short dollar plays.
Trading views
If I were not “big, short” USDCNH, I would add more, but I like the long euro as everyone is talking about it. Plus, it should tag along for a Brexit bounce. I am in at 1.1910, looking for 1.2075 next week with a stop loss at 1.1825, but happy to buy more between 1.1875-1.1910.
I particularly like USDCAD lower as crude oil is finally following the "vaccines are good for oil" playbook after frustrating the oil bulls for a better part of a week and a half. A daily close below 1.2950 will force the natural sellers of USDCAD to get active and we could see an extension to 1.2800.
Pause, Pause, Pause
Pre-OPEC pause
Remarkably so it seems oil has stopped slicing through big dollar figures after WTI 42-43-44-45 and 46 gave way this week due to the huge demand from Asia via spot and term tenders, which was then fortified by a positive elixir of boost juice from a trio of successful COVID 19 vaccine candidate, But alas, the market is slowing down ahead of Thanksgiving and next week's OPEC meeting.
Still, it's easy to argue that the vaccines and the likely deferment of the quota increases expected from OPEC+ will push oil higher next week as downside risk all but evaporates, so what could possibly go wrong? I worry about how quickly oil has priced in the recent good news, including expectations that OPEC will extend current production cuts by 3-6 months.
It remains the market base case but oil will be very sensitive 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 a very uncertain time from prompt oil demand with COVID still in the air.
Pause In The Growth-To-Value Shift
US equity futures are taking a breather, hitting the optimism pause button after this week's broad move higher and continued sharp movement under the surface. Risk assets point to a pause in the value shift with bonds bid, NASDAQ futures outperforming Russell contracts, dollar up a touch, and base metals modestly lower. Oil, though, continues to push higher, with the moves continuing to reflect optimism over 2021 amid positive vaccine developments. There is a defensive skew unfolding on the tape, all of which suggest value stocks are finally at levels where investors are stepping in to trim length.
There has been a lot of upside call buying in the space lately as investors reach for protection/exposure in the energy space, and now investors are starting to trim. A lot still needs to happen before the long-only community returns to this space—but the sharper the moves higher, the more investors are forced to react, especially as everyone thinks about protecting performance into year-end.
A majority of my interbank colleagues I’ve spoken to this week think that a correction is due. The S&P has rallied 11%, more or less in a straight line since Oct. 30. However, between Oct. 12 and Oct. 30, it pulled back almost 8%. The gain from Oct. 12 to today is only 2.8%. Going back further still, there was a 10% correction in the first two weeks of September.
Compared to the Sept. 1 peak, the S&P is only 1.5% higher. The market might appear to be racing away at the moment but has actually only just passed prior highs.
It’s difficult to draw out any material takeaways from the price action around Wednesday's FOMC minutes, with the UST curve modestly bear-steepening. The FOMC signaled that it would provide more guidance soon on buying more assets or moving its purchases further out the yield curve, but at the same time indicated that there was little urgency to do so.
On the sequencing of removing policy accommodation, asset purchases “would taper and cease sometime before” rate hikes.
Bank Of Korea On Hold; Raises GDP Forecasts
The Bank of Korea left its key interest rate unchanged at 0.50%. The decision was in line with expectations, as the economic recovery gathers momentum despite looming concerns about increasing headwinds, including a surge in COVID infections at home and abroad and a strong currency, which is a challenge for exports. The BoK also raised its GDP growth forecasts for 2020 and 2021.
The PBoC net injected a small amount of cash into the system for a fourth straight trading session, despite NBFIs face liquidity challenges this week. The R007 fixing climbed to 3.3% yesterday, the highest in almost two years' time.
Concerns over liquidity are lingering onshore, mostly due to the mounting uncertainty on whether the central bank will provide liquidity support as SOE credit defaults fears hit the money market. The central bank’s steady hand suggests that: Beijing is so far satisfied with China’s economic recovery; the central government seems to be putting the containment of macro leverage back on the agenda; and that China could marginally bear a higher bond default rate with less implicit government support, as it further opens up its onshore market.
With month-end effects kicking in, I expect the increase in rates will likely continue unless the PBoC's daily net injections pick up, or when the month-end is behind us.
AstraZeneca Vaccine: Probably The Most Important Of The Three
Investors, commentators, and market watchers were a little dismissive of the AstraZeneca (NASDAQ:AZN) vaccine earlier in the week. Perhaps they were put off by its lower efficacy score (70%) versus the Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) vaccines (more than 90%). But as pieces in The Economist [paywall] and The Wall Street Journal [paywall] argue, a couple of factors mean AstraZeneca's vaccine will likely be the most important of the three.
The AstraZeneca vaccine is much easier to store and transport and remains stable at normal fridge temperatures for at least six months. It is also going to be much cheaper. Add into that production scale, and the AstraZeneca vaccine looks even more compelling.
The company has a huge network of manufacturing and distribution partners spanning the globe and has promised more than 3 bn doses next year, compared with 1.3 bn of the Pfizer vaccine. Even the lower efficacy numbers might not be as bad as they seem at face value.
Gold
It is difficult to find a silver lining amid all the bearish clouds. Gold prices continue to defend the key $18000 level.
It was much of the same overnight—transfer of ownership continues into stronger hands. But with the inability to even reclaim $1825, it is 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 Nov. 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.