After struggling early on Covid vaccine concerns, US equities were stronger overnight.
On the heels of the reopening optimism, stocks again become a flat out buy as tailwinds from an expected stimulus-induced shopping bonanza will find their way into higher corporate profits and higher earnings per share.
Markets continue to move based on the expectation of a post-virus boom. At least that is the dominant narrative right now. The economy, boosted by another round of stimulus, will surge once the virus is under control and things return to normal.
US President Biden last week offered his version of positivity, saying that families would be able to gather for a July 4th celebration, but only in small groups for backyard barbecues.
But I have some news for the Biden administration; the party has already started.
Investors feel very confident that the US Federal Reserve is unlikely to rock the boat by walking them hand in hand through calibrated policy goalposts that are neither too dovish nor hawkish.
With the policy rate projections and bond-buying pace both likely to be left unchanged, the focus will be on the economic forecast.
Upward revisions to growth would primarily represent a catch-up to the shift higher in consensus expectations since the Fed’s last forecast iteration in December and not too hot of an outlook that could chase rates higher.
In a nod of confidence to Fed Chair Powell, investors continue to dive headlong into the markets.
And as the Nasdaq continues to perform, there are no broad rotations – just a flat outbid for the reopening names as investors unilaterally agree the Fed is unlikely to blink before 2023 this time around.
Risk markets struggled a little bit overnight, with equities under pressure and fixed income climbing. Europe led the sell-off after Germany said it was to suspend the use of the Astra Zeneca vaccine.
In the short term, it’s yet another piece of bad news for the EU vaccination efforts.
However, with other vaccination options, the European Commission’s objective of having 3/4 of the population inoculated by end-August looks unlikely to get pushed back much more than a couple of weeks. Note that the EU is due to receive 1 billion vaccine doses by end-September.
Oil traders focus on supply levels
Oil rallied in Asian trading hours Monday to trade just above USD70 a barrel on robust Chinese data but weakened during the European morning as the market veered risk-off after Germany said they would suspect Astra Zeneca vaccinations.
Oil price took the Astra Zeneca terrible medical headlines in stride. Still, with limited new fundamental news and sentiment currently mired in consolidation mode after the recent month to month tidy moves, traders find they have too much time on their hands and are now focusing on broader supply concerns like OPEC fractures, the return of shale and Iranian barrels coming back to markets.
It is encouraging for higher prices to see that US producers appear to be maintaining discipline despite the rise in oil prices this year. Weekly rig data from Baker Hughes showed a decline.
The drillers’ response suggests a level of caution that would not usually be evident with an oil price move of this magnitude. Whether this discipline will hold remains to be seen. And the potential for a US supply response remains one of the critical risks for oil this year.
That said, the main concern for the recovery in crude prices has been the risk of a fracturing of OPEC+ cohesion as market conditions improved, given how much supply was (and is) still curtailed.
So far, OPEC+ discipline has been surprisingly good, even when tested in recent weeks at higher prices.
Boots on the ground suggest Chinese imports of Iranian crude might double in March from February to 856kb/d. There have been reports recently that Iranian production is ramping up, potentially designed to test the Biden administration’s commitment to sanctions put in place by the previous administration.
Whether the ramp-up in Chinese imports in March represents a step up in Iranian production or just a more accurate labelling of the sources, upside to Iranian production is an important variable to watch.
Market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi
