US stimulus hopes vaccinate bull markets

Equity markets rise on stimulus hopes

Equity markets shrugged off a previous run of losses, and the US dollar weakened overnight, despite weaker US data. Rising hopes that US stimulus negotiations were making progress, with the two-part latest incarnation appearing more palatable to both sides, stopped the multi-day retreat in its tracks. The price action overnight emphasising that a positive outcome to the bi-partisan talks and, to a lesser extent, the USD1.4 trillion government funding bill are trumping even the FOMC meeting in importance.

Lawmakers may have been given another nudge overnight to get something done, with the New York Empire State Manufacturing Index, and US Industrial Production data disappointing. That follows a series of disappointing weekly Initial Jobless Claims and Non-Farm Payrolls data suggesting that Covid-19’s rampage across America is undermining the economic recovery.

Markets also received a booster shot from the US FDA, whose scientists stated that Moderna’s Covid-19 vaccine appeared highly effective. That clears the way for formal emergency use approval by the FDA, possibly as soon as Friday.

The heavy data calendar continues this evening for the US, with Retail Sales for November, and Markit Flash PMIs for December released. Disappointments from both will increase the stimulus noise from markets and place expectations squarely on the FOMC to act when they announce their latest rate decision at around 0300 SGT tomorrow morning. I, and seemingly much of the market, expect the FOMC to shift their bond-buying emphasis to the longer end of the curve to cap recent rises in long-term rates.

At a minimum, the street will be hoping that even if the Federal Reserve does not choose that path tomorrow, they strongly signal their intention to do so in the New Year. Ideally, the Fed would have like to have been doing so in conjunction with a freshly minted US fiscal stimulus programme from Capitol Hill. Alas, barring a miracle, that will not be the case. The Fed may choose to hold off doing so until that happens. With the street long to the gunnels on equities, and equally overloaded on short US dollar positions, the risk is for a rather sharp correction that could spill over into gold as well. Such is the weight of expectation that tomorrow and Friday could be characterised by weaker equities and a stronger US dollar. However, it is essential to keep one’s eyes on the prize, and for the asset price inflation weak dollar trend to quickly reassert itself into next week.

Europe and the United Kingdom will also release Markit Flash Manufacturing and Services PMIs for December, which should give markets an insight into the effects that Covid-19’s sweep across the continent is having on the real economy. Manufacturing should continue to hold firm, but services are likely to have suffered as restrictions have ratcheted ever higher. Despite short-term noise around the data releases, the bigger story of US stimulus and the FOMC meeting will be the underlying price drivers.

One exception is, of course, Brexit. Talks continue, and the noises from Europe are that progress is occurring. Markets have been led to water many times by this rhetoric, but that hasn’t stopped them loading up on sterling overnight in expectation of an agreement. GBP/USD rose 1.05% to 1.3450 in overnight trading. If Brussels and London have spoofed markets yet again, the return to earth will be swift for sterling, which will probably fall back to 1.3200. Complete failure will see sterling burn up on re-entry, on its way to a fiery landing around 1.2500. Given the weight of long positioning out there in sterling, an early Brex-mas present likely limits gains to the 1.3800 area.

Japan’s Jibun Flash Manufacturing and Services PMIs for December and the Balance of Trade were the only notable data releases for Asia today. The PMIs followed the script, manufacturing outperforming on global recovery hopes, services easing as domestic Covid-19 restrictions erode demand. The story was semi-repeated with the trade numbers. Exports YoY fell by a worse than expected 4.2% as key markets in the US and Europe plateau under the strain of Covid-19. Imports though, plummeted by 11.1% YoY led by aircraft and petroleum imports. Rising oil prices will alleviate the energy side, but Japan’s supplementary budget number “I’ve lost count” arrives in the nick of time to stabilise domestic demand. The Bank of Japan policy meeting will assume greater importance this Friday, with markets expecting more asset buying by the BoJ now. Anything less will likely prompt some unwelcome yen appreciation.

With Japan’s data now in the rear-view mirror, regional markets will content themselves to hitch a ride on the US fiscal stimulus train. Equities and regional currencies should gently appreciate throughout the day. Markets though will be vulnerable to headline-driven volatility in such a vacuum.

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