Oil update: The pain trade set in as hedge funds have little option but to reverse their bearish oil market bets as the overpowering bullish narrative around the vaccine says those bearish bets are flat out wrong.
Crude oil blows through $45,$46, $47, and then this morning $48 on a bullish extension via the AstraZeneca (NASDAQ:AZN) COVID-19 vaccine which added to the good news from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) over the previous fortnight with the added bonus that the booster shot appears to be cheaper and more easily stored. This development is supportive of a process of normalization in economic activity and oil demand through 2021.
Expectations for relatively rapid deployment of the COVID-19 vaccine continue to support wider markets, oil and oil equities, outweighing for now some of the recent signs of tensions within OPEC ahead of the meeting next week.
It seems the market expectation is still that OPEC+ will extend the current phase of production cuts by at least 3 months and that major producers like Saudi Arabia will continue to support good aggregate compliance to offset slippage elsewhere within the group. I suspect if we get 3 months and the group sends a stern public warning that non-compliance will not be tolerated for the 3 month extension period, you can likely bank another couple of dollars in the profit side of the ledger and maybe even breach the mystical $50 level in Brent next week
This is a market that is totally underweight energy and you can feel the pain trade set in as hedge funds have little option but to reverse their bearish oil market bets as the overpowering bullish narrative around the vaccine says those bearish bets are flat out wrong.
Investors will begin to position for high-profile policymaker pressure starting to bear fruit
Cross-asset price action suggests unbridled optimism around the US presidential transition and COVID vaccine prospects, factors that are overwhelming downside risks to the near-term outlook. A rotation in stocks is underway despite US inflation breakevens being unchanged this month, suggesting reflationary trends have room to run. Meanwhile, long gold positions are under pressure. The high and positive correlation between gold and the S&P 500 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 leaves prices vulnerable in the near-term.
US data and events are in focus (FOMC minutes, Q3 GDP, jobless claims) on Wednesday in a truncated trading week ahead of the US Thanksgiving holiday. The Nov. 6 FOMC meeting indicated that the Fed was happy with the amount of monetary accommodation. Attention will be paid to the Committee’s discussion on 13(3) lending facilities in light of the Treasury’s instruction since then that the Fed ends some of its emergency lending schemes at year-end.
The expected nomination of former Fed Chair Yellen as the incoming administration’s Treasury Secretary pick cushions the blow of an untimely withdrawal of support for the real economy. A Yellen-Powell policy combination in government and the central bank is as dovish and positive as one can imagine for risk assets. Even if Congress balks at further significant fiscal stimulus, through restarting 13(3) facilities with government funding and/or unemployment spending, investors will position for high-profile policymaker pressure starting to bear fruits
Asia Markets: milestones galore
Dow breaks through 30,000; S&P 500 closes in on record territory; Oil rips higher through its post-March range.
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. US 10-year Treasury 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 revelling 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, OPEC and 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: SPDR® S&P Oil & Gas Exploration & Production ETF (NYSE:XOP) and Energy Select Sector SPDR® Fund (NYSE:XLE) .
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.
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.