Stephen Innes: US and European markets rebound

Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi, 

While some investors are still worried about the systematic risk and “tip of the iceberg” scenario amid the potential fallout from last week’s retail onslaught and what paper losses could be lurking below the surface, US equities attractively recovered overnight with gains recorded in Europe as well.

Helping sentiment at both the systematic risk and structural market-levels, the VIX fell 3.45pts with retail investors less active inequities, turning their attention instead to silver which lifted to an 8-year high overnight.

US equity markets have had a much less hectic and voluminous start to the week than anticipated by some. The later possibly due to US northeast snowstorm playing a role, but with the market fear gauges like the VIX falling, there is less urgency to de-risk and folks felt more comfortable adding with volatility falling.

Of course, the sound of more stimulus which tends to raise all boats was music to the market’s ears.

President Biden has invited ten moderate Republicans to a meeting, set to take place as this daily note hits your inbox to discuss the two sides’ competing stimulus packages. President Biden has indicated a strong preference for bipartisanship on the deal, so watch for headlines.

And dancing to the stimulus beat, Tech is trading well today, mostly thanks to mega-cap Tech names which are well in the green on average.

Bipartisan support for US stimulus package

This week’s talks in Washington DC should clarify the Biden administration route to deliver more fiscal stimulus. The president has proposed US$1.9 trillion, and over the weekend, a group of 10 Republicans countered with an offer of US$600 billion.

In what could be an essential signal that something big will happen, the Biden administration seems already to be upping the pressure on one of the key Democratic senators, Joe Manchin of West Virginia. Last week, VP Kamala Harris gave an exclusive interview to a local TV station in West Virginia touting the importance of ARP – the TV station even noted how unusual it was for the White House to get in touch with them.

Of course, “bigger” is always better when it comes to stimulus and stock market concerns. Still, with worries over the new virus variants possibly leading to lengthier mobility restrictions so the medical community can better monitor vaccine efficacy on the ground, any stimulus big or small will come at a most welcome time for families that make rent, and one in four small businesses are closing permanently or have already closed.

The recent retail market flummoxes amid the unwind of popular Hedge funds “short and long” positions triggered by a sizable spike in market volatility seems to be ebbing.

The cross-asset spillover of the positioning contagion chill has been somewhat limited so far. Rates have remained close to post-crisis highs, and energy commodity prices barely moved supported by shrinking supply.

Since November investors priced an improving macro backdrop following the announcements of Covid-19 vaccines supported by the expectation of massive US stimulus support. And while market positioning and concentration risk is a worry with hedge fund leverage ratios significantly elevated, but the most comforting blanket for investors is that the macro outlook has not changed materially in recent weeks.

Oil prices recover

The critical take away from yesterday’s oil market recovery rally is that OPEC+ members seem to be taking their commitment to output cuts to the heart. And having OPEC+ singing from the same hymn page is music to every oil trader’s ears.

And with the JMMC unlikely to signal any need to rock the boat, price planks are all in place with the street awaiting word on the US stimulus deal for the next bullish impulse.

With the week dominated on the supply headline front with JMMC on tap, OPEC+ didn’t disappoint as the production group’s compliance level turned more than a few oil traders’ heads on a swivel overnight.

Oil rallied as OPEC+ production compliance, ringing in at 99 % helped lift prices even in the face of a stronger US dollar. Demand in the physical market has been the driver of a strong front of the curve.

And while immunization uncertainty with new Covid-19 variants and rising global infection numbers continue vying for attention with vaccine deployment updates, the drivers of the recent deficit – both lower supply and higher demand levels are very comforting signs. It also suggests downside risk remains limited unless there is a material change in expectations for the duration of the pandemic’s impact on demand.