Sideways

Except for currency markets, most other major asset classes had a profit-taking look about them overnight. Equities, precious metals and energy all beat a gentle retreat as investors used concerns about Covid-19 and US yields to book some profits and take some risk off the table. Bitcoin fell 20% at one stage overnight, as a harsh lesson in the difference between tradeable versus investible assets was dished out. I noted that some “institutional investors” called it a correction after its recent galactic speculative rally with some bemusement. It seems that the Emperor’s New Clothes syndrome is alive and well in 2021.

China and the United States continue to lock horns, with fund managers, banks and anyone else trying to do business with both caught in the middle. If you do business with certain entities in China, you will be in trouble with the US government. Conversely, if you don’t do business with some Chinese entities because of the US government restrictions, you will be potentially “punished” by the Chinese government. Nobody said that being the meat in the sandwich was fun, but markets seem to be looking past this situation at the moment. Either they expect a more civilised diplomatic atmosphere to prevail once the dying days of the Trump administration have passed, or the potential Democrat-led multi-trillion stimulus trumps all. My money is on the latter, but I suspect both assumptions will be challenged under the Biden administration

The US government added Cuba to its list of countries sponsoring terrorism overnight. Although not an earth-shaking announcement for markets, it highlights what I touched on yesterday; the primary source of volatility this week will emanate from the White House and its last hurrah list of executive orders. I shall not predict what comes next, just that we can expect more surprises, and they probably won’t be market positive.

It is a measure of how overbought markets are in the short-term that investors started fretting about new restrictions on big tech overnight, with Twitter’s share’s falling over 6.0%. Realistically, it was just another excuse to book some short-term profits for investors. As I have stated previously though, 2021 may well be US big techs Standard Oil year, which will enjoy bipartisan support in Washington DC.

US yields send dollar higher

The main disruption to the market’s story though continues to be the grind higher in US yields, notably the 10-year note. It added another couple of basis points again overnight, with its effect most notable in currency markets. The US dollar continued to squeeze higher, which is no surprise given that financial markets spent most of 2020 selling as many as they could. Short US dollar positions are likely to endure more pain through January and possibly February before normal service is resumed.

The rise in US yields would have to go a lot further to jeopardise the equity rally and offset Saudi Arabia’s work in the oil markets. Precious metals look even more vulnerable than short-dollar positions at the moment and if USD1760.00 an ounce fails, I to shall throw in the towel on record highs for gold in the first half of 2021. Much will depend on the Federal Reserve’s comfort with higher yields. To that point, the street will, for the first time in months, move back to Fed-watching mode. Most notably, the comments from voting FOMC members as they go about their public speaking duties.

Pivoting to Covid-19 for a moment, I note that Johnson & Johnson are due to release preliminary data on their vaccine at the end of January. J&J have been lost in the messenger-RNA noise of 2020, but if their vaccine works, it could be a game-changer. The grandee of big-pharma’s vaccine will be a single-shot vaccine. It will remove the logistical challenges of the two-shot distribution, whether stored at Arctic temperatures or not. It will not be an instant panacea of course, but in combination with room temperature vaccines from Astra Zeneca and Sinovac, for example, it will potentially accelerate the vaccination process. I could quite easily see another mass cyclical rotation move occurring of the order of the Pfizer/BionTech announcement, if trials appear successful, which I sincerely hope they will be.

Today’s data across the world is low impact with the US Jolts Job Openings likely to be more closely watched than is usual after Friday’s headline Non-Farm Payrolls disappointed. We also have FOMC Governors’ Bostic, Kaplan and Mester speaking this evening, which circles back to my comments above. Comments reflecting a lack of concern over the rise in US yields will likely greenlight more US dollar strength.

Regionally, the Malaysian King declared a state of emergency across the nation today, ostensibly to aid the fight in Covid-19 sweeping the country and extending until August. The Malaysian Prime Minister has announced that Parliament will not sit during the emergency, nor shall any elections, national, state or local be held. That heads of the noise of a snap election from the UMNO faction of the fragile ruling coalition. Wishing to hold a snap national election during a Covid-19 pandemic shows a certain detachment from your constituents’ needs, in my opinion, and Malaysia equities and the ringgit have eased today.

However, it should be a medium-term positive for Malaysian markets. The King’s efforts are bringing unruly segments of Malaysia’s always complicated political sphere to heel, allowing the government to get on with the real issue, defeating Covid-19 instead of looking for knives in its back.

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