US Close – US Capitol on Lockdown, Blue Wave Rally, Fed Minutes, SA COVID strain, ADP loses 123kjobs, EIA’s big draw, Gold baffled, Bitcoin’s Miller Time

The season finale of the Trump administration provided more twists and turns than anything Shonda Rhimes has created.  The Georgia Senate races shocked America as Democrats managed to win both races, seemingly paving the way for President-elect Biden to push forward with his agenda.  The results are not final, but Democrat Raphael Warnock is projected to beat Senator Kelly Loeffler and Democrat Jon Ossoff is leading Senator David Perdue.  Wall Street is pricing more stimulus checks, aid for state and local governments, and more fiscal support once COVID lockdown efforts are intensified.

Today, Congress was supposed to mark the end of the 2020 presidential election with the certification of the Electoral College vote count.  Everything was going as planned but protests erupted after President Trump told a cheering crowd “We will never concede.”  Protesters have stormed the US Capitol and the House floor has been evacuated.  The US Capitol is on lockdown and it is unclear when the certification process can resume.  Washington DC Mayor Bowser is ordering a curfew at 6pm. 

US stocks are paring gains as Trump protesters seek to overthrow the presidential election results.  Treasury yields are off their session highs with the 10-year yield hovering just below the 1.04% level. 

Fed

The Fed’s minutes showed all FOMC members felt the current pace of purchases was appropriate.  Now that the Democrats got their ‘blue wave’, the Fed will not be immediately pressured to do more to make any shortfalls from Congress.  Biden will be quick to deliver fiscal support and that means yield curve control is on the backburner until yields skyrocket.  The Fed may be on cruise control until the US Treasury 10-year yield tests 1.25%. 

ADP

The ADP national employment report painted a bleak picture for the labor market.  The private sector lost 123,00 jobs in December, much worse than the consensus estimate of 75,000 jobs created.  This was the first loss of jobs since April and it could get uglier since the impact of COVID is worsening.  The upcoming nonfarm payroll report might eke out a positive print, but calls will grow for the following month to show job losses. 

Virus

The South African COVID strain is troublesome as it mutated the receptor-binding domain (RBD) which allows it to attach more easily to human cells and could allow this strain to defeat some of the antibody treatments.  This newest strain might also show that prior immunity might not be effective.  Health experts are worrying that global fight against could take a turn for the worse as healthcare capacity will take on further strain from the UK and South African strains.

Nasdaq Reversal

The early rotation out of big-tech into small caps was short-lived as investors realized sweeping tax and regulatory reform was unlikely since the Biden administration will not be able to get the required 60-Senate vote requirement.  Cyclicals may outperform but a ‘blue wave’ does not mean it is time to abandon FAANG stocks. 

FX

The dollar will still be structurally weaker, but the excessive bearish positioning suggests traders may have to cover positions.  The dollar days are numbered once the Georgia election dust settles.  The coronavirus pandemic is far from over as vaccine rollouts disappoint and as new strains raise the probability of more lockdowns.  The Biden administration will not take any chances against reopening the economy and that will pave the way for much for fiscal support this quarter.  The Fed’s balance sheet will continue to grow and that should provide steady pressure on the dollar as it becomes a funding currency.    

Oil

Crude prices surged after EIA crude oil inventory report posted the largest draw since August and as a ‘Blue Wave’ bolstered the prospects of stimulus and sent most risky assets higher. 

US crude stockpiles fell over 8 million barrels, more than the consensus estimate of a 2.7 million draw, while US production remained steady at 11 million barrels.  For the first time in 35 years, the Saudis had zero crude shipments to the US.  Despite the shockingly large draw, all the products had large builds and gasoline demand fell to the lowest level since the start of the pandemic.

WTI crude seems poised to rise higher as the Biden administration will clamp down on US crude production, the Saudis tentatively alleviated oversupply concerns with their 1-million bpd cut present, and as the dollar’s days seem numbered. 

Gold

Gold traders may feel they are in Crazy Town after prices plunged despite a surprise ‘blue wave’ and a negative ADP employment report.  Gold’s weakness has been attributed to some profit-taking, but it is mainly due to a strong surge in Treasury yields that has put a tentative pause in the dollar rout. 

Gold should still see strong safe-haven flows this quarter due to lingering COVID worries and eventually as investors need inflationary hedges.  Global monetary and fiscal stimulus will remain elevated as the new virus strain risks grow and on a lackluster vaccine rollout.  The $1,900 level should hold for gold, but if it doesn’t the $1830-$1870 will provide massive support. 

Bitcoin

Bitcoin is surging after a surprise ‘blue wave’ boosted the prospect of more stimulus and another big investor Bill Miller’s becomes another supporter for the cryptoverse.  Miller’s newsletter did provide any major new insights but highlighted the market’s underestimating of the risks of inflation.    

The macro argument of diversification away from the dollar and gold to Bitcoin seems to be steadily gaining followers.  Bitcoin momentum seems to be firmly in place.  

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