Market Analysis Today: OPEC+ yet to reach 2021 output deal
· OPEC post-meeting risk-rewards still skews lower
· FX traders roll out their Biden admins playbooks
· risk wobbles on the month-end flow
Oil has been trading soft after OPEC+ members could not reach an agreement on output in 2021 during the first-round meeting at the weekend.
As things stand, the production cuts the group agreed on earlier this year will end in January.
OPEC+ sources said, however, that talks will resume Monday and the current discussion is around extending the 7.7 mbpd of existing production cuts into “the first few months” of the new year. The sources said it was unlikely the group will be able to agree on deepening the production cuts.
Regardless of the market’s base case, given the post-meeting risk-reward skews lower, oil is struggling to find fresh buyers even more so after Dr Fauci, in no uncertain terms, said: “We may see a surge upon a surge” in two or three weeks over the holiday season.
Investors ‘hitting the pause button’?
Outside of China’s performance on a bullish combination of data and easing, a lot is going on under the hood in global markets into month-end.
It was busy last week despite the US holiday MSCI rebalance driving activity, but the trimming winner rotation has hit the pause button, giving way to some profit-taking.
It seems the market is doing a lot of “hitting the pause button” these days as year-end approaches, and I do not think investors care if it was a November to remember they will continue to defend against the prospects of dreadful Covid-19 infused Christmas Eve.
Taking stock of most recent developments, the anticipated holiday season US Covid-19 case counts explosion notwithstanding, we are likely still in a muddied environment for risk in the coming weeks – Janet Yellen, as Treasury Secretary, would even need Republicans to play ball on stimulus.
Unless the Democrats can win the Georgia, run-off races (betting markets favour Republicans at just under 70% probability), Senator McConnell has given no indication yet that he will budge.
Anyhow risk a seen through US stocks’ lens has so far notably struggled to follow through on its momentum since the positive news from Pfizer and Moderna.
Investor confidence in US equities has been holding up, and that sponsorship remained over the Thanksgiving holiday, but pension selling may finally take over on rebalancing supply into month-end
And as we move through what looks to be a Covid-19 infused December of despair for growth, especially as Georgia run-off becomes more increasingly focused, more investors will be forced to cut and run, especially as everyone will be protecting year-end performance
China rates rally
CNY rates rallied about 7bp across the curve, with the People’s Bank of China (PBoC) conducting a surprise CNY200 bn of medium-term lending facility loans today. At the same time, China’s manufacturing PMI for November came in above consensus. Suggesting the surprise policy move has assuaged some investor bond market jitters.
Forex traders rolling out their Biden playbooks
FX traders are rolling out their Biden administration playbooks where Janet Yellen could be the new bearish dollar signal-caller.
The stock rotation roadmap favours cyclical heavy Europe’s relative strength instead of strongly Tech weighted US indices creating real EURO inflow dynamics.
In the meantime, the EURUSD looks set for a sustained break of 1.20,
· Positioning is no longer extreme longs
· The virus wave in Europe is likely peaked; the US is still sparing
· European equity inflows will pick up on rotation from Tech US to cyclical heavy Europe
· The existential risk premium around the Euro break-up is at its lowest in years
Beyond that, the vaccine rollout has increased confidence in the positive cyclical outlook, which should favour a weaker dollar across the board.
Bottom line, everything that was pointing us towards caution on the Euro in September has now turned.
The street is still talking about how the dollar’s medium-term outlook is about as bearish as one could get. It does not feel like the usual analyst’s lip service either.
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’s sell-off continues
It’s been a one-way street since the vaccine news, and gold continues to sell off aggressively amid a combination of liquidation from macros, CTAs, ETFs and a lack of physical demand meeting good-sized buying from longer-term names, but it is well absorbed.
But the ETF overhang offers up a pretty chunky target for Gold ETF to go after, and Gold SPDR length could be the yardstick for gold convictions. Just as Gold ETF attracted a lot of bullish attention when gold was on the way up, the ETF could attract a lot of bearish attention on the way down and could be a significant source of supply.
25% of the Gold SPDR position weight was accumulated between $1700-$1800, so a further $50 or $60 price drop could trigger a massive clear out. Indeed, this would suggest that if the $1750 psychological and technical support area does not hold, the risk of a deeper correction could swell by ETFs’ potential to capitulate.
