Midweek Market Watch: Re-opening and reflation theme dominates the markets

By Stephen Innes, Chief Global Market Strategist at Axi,

The reopening and reflation theme is evident in both the US and in Europe at the moment.

In itself, this is not surprising, and arguably healthy – since a broadening out of leadership in reaction to what markets have been talking about and in terms of what investors see in terms of breakeven expectations in the market.

With bond yields now having some beta moves, Financials started to rally – including in Europe, up 8% on the week. This move is still very unpopular (and under-owned) filled with much scepticism.

However, the volume is picking up. Usually, the first sign you should not fight this momentum.

The only surprise was that the market moved up at the Index level in the past week despite this rotation. Given the weight of the rotation in versus out, I would have expected the need to consolidate or at least sell-off at the Index level.

Some of this may have to do with the fact that after the short squeezes seen last week, futures possibly replaced stocks as hedges and are probably becoming uncomfortable here and buying when opportunities present.

Of course, the trend is your friend, so goes the saying. But so is being long and wrong.

The reach-for-yield and the various extrapolations around the narrative have combined to generate the most improbable market pricing possibly. US market-implied expectations haven’t been higher since before the 2008 financial crisis.

But with such a long runway for price action evolution around vaccine optimism, as consensus as that trade is, it is hard to believe it is all in the price.

Oil has rallied 62 percent in three months and continues to be the primary flag bearer for frothy risk sentiment and vaccine optimism.

But bringing that back home to the real-world, higher oil prices are also a boon for Malaysian fiscal position US$60/bbl; this compares with the government’s 2021 budget assumption of US$42/bbl for 2021, US$45-55 for 2021-23.

Assuming that holds, with a US$15/bbl increase in oil price, that’s additional RM4.5bn govt revenue vs the estimated RM237 billion govt revenue in 2021 and will, however, be pretty significant to the fiscal deficit situation and could provide the government with a meaningful wiggle room to pump prime and fund some of the large infrastructure projects that have been a topic of ongoing discussion in Kuala Lumpur.

Indeed, this should eventually see the ringgit trade much stronger this year.

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