Of Confidence & Differentiation | OPEC

Week-in-brief by Vishnu Varathan, Head, Economics & Strategy | Asia & Oceania Treasury Department | Mizuho Bank, Ltd.,

Further surges on Wall St, with a fresh record on the S&P500 reveal confidence; from upbeat US (jobs) data and, in markets as a whole. But the accompanying USD strength is admittedly not a feature of “risk on” but a specific quirk of vaccine differentiation. So less gloomy jobless claims following upside surprise in ADP jobs squares with confidence about the US economy getting back on its feet. Especially with vaccine rollout overtaking new COVID infections, which have been on a sustained decline (albeit still being high).

Data catalyst for “risk on” was fanned by Yellen’s pronouncement of confidence in markets’ “core infrastructure (that) was resilient during high volatility and heavy trading volume”. This gave markets the requisite assurance to push equities higher amid welcome earnings. While “risk on” ordinarily corresponds to a softer USD, a steeper yield curve alongside sustained US advantages gained in the vaccine roll out prompted UISD snap back. But to be sure, USD snap back on vaccine differentiation was in turn differentiated.

While EUR tumbled below the 1.20-handle on Europe’s vaccine lags, GBP rallied from sub-1.36 pre-BoE towards 1.37 as the BOE surprised with hawkish sound bites. USD/JPY was boosted to mid-105 while USD/SGD headed ato high-1.33. AUD dips below 0.76 though was differentiated, equivocating on firmer commodities led by sustained traction in Oil prices.

OPEC+: Accelerating Market Rebalancing

Oil prices continued to surge, with Brent hitting $59, as Wednesday’s OPEC+ meeting concluded with it’s two leaders, Saudi and Russia stressing on; the “importance of accelerating market re-balancing without delay” and in the context of “uncertain” demand prospects. That is to say, after Saudi’s unilateral 1MBpD supply cut for February and March, it is unlikely that the OPEC+ will hurtle towards a rapid restoration of full supply.

Pointedly, the OPEC+ cartel is focused on ensuring further draw down of global inventories as global demand recovery remains fragile. And this is helping to manage any concerns that supply may prematurely run ahead of demand recovery. So it appears that hurdle to Brent over $60 is being lowered; but it is still premature for an unrestrained surge to $65-75, given the likelihood of US supply response to higher prices.

RBI Status Quo on Budget Spotlight & Inflation Glare

The RBI is set to stay on hold as it;

i. defers to the Budget spotlight, and

ii. buys time to ensure it is out of the inflation glare.

The short version of the Budget limelight that by maintaining a large fiscal deficit (6.8% of GDP) for FY21/22; with a tilt towards development spending alongside plans for a “bad bank”, the fiscal stance is primed for a large stimulus with a high multiplier. And so, on that account, the RBI may be inclined to leave some space for fiscal flourish.

What’s more, to be sure, receding inflation is in the early days; and far from a confirmed trend that creates policy comfort. As we has alluded to in a recent publication, inflation relief is indeed overstated by the decline in food inflation. Whereas India is not yet out of the woods with regards to stagflation-type risks. And this ties the RBI’s hands.

What’s more, with focus on a still supportive, albeit less aggressively so, budget, the RBI has another reason to stand by the sidelines. But this is not purely for the reasons of not stealing the limelight from fiscal policy. More importantly, it is to mitigate the risks of fiscal slippage (from consolidation) plans and hedge against “taper tantrum” tail risks; which entails restraint on rate cuts as well. More importantly, it is to mitigate the risks of fiscal slippage (from consolidation) plans and hedge against “taper tantrum” tail risks; which entails restraint on rate cuts as well.

Credit Source: Mizuho Bank Ltd