European markets appear set to open lower while Asian indices saw profit-taking into the weekend on the back of a further uptick in Covid-19 cases in China, a net liquidity withdrawal from the PBoC, as well as a further escalation in US-China tensions after the Trump administration blacklisted more Chinese firms.
The Covid-19 cases present a clear and present danger to the bullish oil narrative.
Patience is warranted here as the gravy trades have already been won and narratives show early signs of potentially policy transitioning. The street is starting to approach marginal trades with caution.
US Federal Reserve chief Powell went to great lengths to sound dovish in yesterday’s announcement. But given the coordination level that seems to have occurred with the Fed speak over 48 hours, it is difficult to separate fact from fiction.
What can be said is the Fed is scared of causing another taper tantrum and they likely have not yet incorporated the next tranche of fiscal stimulus into their outlooks, not to mention herd immunity.
All of this will feed into the Fed outlook, so the story isn’t over because Powell says it is. How markets interpret the current FED push back is the real question, but it may be some time before markets resume trends due to the excessive taper talk.
For the moment, stay nimble and wait for attractive entry levels.
Meanwhile, incoming president Biden’s $2 trillion stimulus number will have to come down to win bipartisan support and may not even be a game-changer for markets given it will be the last with smaller infrastructure.
Hence the pushback in the Canadian Dollar, which is also wearing some oil market fatigue into the weekend as oil price fall under the China Covid-19 cosh.
One measure that is sure to be a massive sticking point is the $15 national minimum wage. With most of these low paying jobs in the services sectors which are the most severely fractured of all due to Covid-19. There seems to be a broad policy agenda disconnect to have this industry pony up in Peter pay Paul fashion.
There is still a willingness to hold USD/Asia short, but broader dollar moves suggest some reduction in positioning, particularly in high yield and China-related currencies.
The new Covid-19 variants alongside the harsher lockdowns have meant risk allocation this week have been somewhat more cautious compounded by higher UST 10-year yields.
The EURUSD is in a world of its own and it still looks soft, with the lower beta to risk and headwinds from Italian politics and difficulties with Covid-19 vaccine rollout in Europe.