Reflation trade pushes stocks to record high

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

US equities were stronger overnight and were on track for a fresh record high.

The reflation trade remained fashionably in vouge to start the week, further buoyed by an upbeat set of earnings from the holiday season and vaccine optimism that provides the ultimate recovery safety net that will allow people to participate on all those pre-Covid activities like going to a movie or having a meal out at the local eatery again.

But importantly, these activities will provide a massive boost to economic sectors most beaten down by the virus.

With much of the stimulus fondant wrapped around the US Fed policy cherry-topped recovery cake, so in the wake of yet another exceptional top bill podium performance by US Treasury Secretary Yellen over the weekend, the latest stock market buying bonanza could be as much a reflection of investor confidence in the Biden administration to not only steer the economic recovery on an even keel but handle the pandemic.

It is incredible how quickly markets went from fear to focusing back on the positives. There is a lot of talk about inflation and broad upward movement in asset prices globally. 10-year inflation break-evens have hit their most expansive levels since 2014, helping re-fuel the reflation theme and providing the bid to energy, materials, and financials.

But if there is a cautionary tale of the tape with volumes much lighter to start the week, suggesting some prefer to sit out this latest fear of missing out mover higher as vaccine concerns continue to linger in the background.

After yesterday’s news that South Africa had halted its rollout of the AstraZeneca vaccine, another speed bump might be emerging in Israel.

So, while the vaccine is working, it may not be working effectively enough as some rollout plans had expected.

While virus incidence and hospitalizations in older Israeli adults have been falling, severe cases of COVID-19 in the under 60 categories have increased.

These latest findings suggest mobility restrictions in densely populated areas of the world currently struggle with the old variants may need to be extended.

Finally, as equity volatility drops back towards fair value, look for attention to switch back to rising US bond yields. Inflation expectations can act as a positive impulse for equities but are nearing levels where they become headwinds.

 Oil breaks through $60 per barrel

Brent surged though $60/barrel like a hot knife through butter – continuing the positive momentum from last week. Progress on US stimulus and optimism around the rollout and effect of vaccines across the remainder of 2021 and a slightly weaker US dollar helps the view albeit there was mixed news on the impact of the current vaccines formulated on the emerging South African variant.

It was another solid day of gains for oil on Monday. Much of the focus has fallen on Chinese demand, which has been rock steady buyers of North Sea cargoes lately in the Platts window. Simultaneously the OECD inventory declines by design due to OPEC supply curtailment regiment are clear evidence helping the rebalancing act.

But perhaps a cut above all else is that focus has now shifted to North America as US demand via hometown USA is now the largest buyer of domestic US crude oil for January.

This is the crucial signpost the bulls have been relishing as once consumption in the world’s number one consumer of Oil turns the corner it should make the ride much smoother for oil price ascent.

And while I’m not a big fan of technical signals like overbought and oversold, as positioning can remain at elevated levels provided the fundamentals hold up. But since Oil is surging on a combination of supply constraints and rising demand (both current and anticipated) a word of caution is due as both the WTI and the Brent markets are well in thick of overbought territory.

So, while I remain a bit cautious at current levels, the medium and longer-term outlook for demand is healthy, and one can understand a willingness to look through some of the near-term uncertainty that remains for Oil.