US equities were weaker Monday, S&P down ½% heading into the close. The main narrative underpinning sentiment over the past 24 hours appears to confluence month-end portfolio rebalancing and weaker economic data expectations in December as COVID concerns flare up again.
Highlighting the economic data causes for concern The Dallas Fed November Manufacturing activity index came in below expectations, at 12.0 vs. the 14.3 surveys, following the Chicago PMI miss earlier on Monday. The Dallas Fed miss was consistent through most of the sub-indices, with new orders falling to 7.2 from 19.9, though the number of employees increased to 11.7 from 8.7. Prices paid rose to 35.0 from 29.4, while prices received fell to 4.7 from 6.8, indicating potential margin pressure.
The Malls of America, zombified by a lack of footfall, is one thing, piles of debt (unserviceable, even at relatively low yields) another; however, even worse for these firms are the year-on-year comparisons, it seems. It is usually in these last couple of months where many retailers make their annual profit. Still, the weakness of data across outside of Asia highlights lockdowns (forced or self-imposed) have begun to affect. Simultaneously, early reports suggest Black Friday may have been underwhelming, even taking into account online activity, one of the new ‘norms’ of 2020. It is driving speculation that the reinstatement of lockdowns and enforced Christmas-lite has suddenly led the consumer to lose its appetite.
Flashing Green Lights
Flashing Green lights at the end of the tunnel suggest investors should look through the immediate COVID-19 concerns and focus on the future, which seems incredibly bright and bullish.
So, with month-end selling pressure mostly out of the way, it could allow investors to focus on those flashing green sectoral lights at the end of the Covid tunnel.
The US industrials and materials sectors hung well today despite the value trade lagging, but there is a defensive skew under the hood consistent with the broader tape. For the first time in a while, early weakness in the aero complex has not been notably bought, perhaps reflecting how far things have moved and how much length investors have already added.
As a reminder, the most important theme from my trading purview last week was that some of these value names had ‘finally’ gotten to levels where we were running into fresh selling supply. That supply is not necessarily back today, but many words are at more debatable levels now.
Month-end is bringing some volatility across asset classes. EURUSD can still trade higher, but it is pausing failing at the previous year-to-date highs. 1.1930-40 is the short-term pivot. Gold price is bouncing off cycle lows, and after the massive position cleanses of the last few weeks, at some point, it will re-correlate with the dollar and 10y US real yields, and that could offer support.
But even if the tunnel’s end is in sight, one cannot be certain what the landscape will look like on the other side. Many hope it will be wonderfully strikingly familiar, just like the old pre-Covid normal, which, of course, is the key to the value versus growth discussion in stocks. However, yields barely blinked post-vaccine announcements Bonds as a silhouette against the broader market purview – are always the less sentiment-driven, and usually a full out macro tell – Bonds are then signaling us that low growth, low inflation, still muddling through if you like, awaits us the end of that Covid free tunnel.
OPEC meeting talks delayed so cooler heads prevail
According to press reports, the big news overnight is that Saudi Arabia is considering resigning from its role as co-chair of the OPEC+ Joint Ministerial Monitoring Committee, which puts pressure on crude.
Saudi co-chairs the JMMC with Russia. It is not clear what Saudi’s goals are, but it is not easy to imagine an OPEC+ without Saudi playing a direct role at the top.
The talks are delayed letting cooler heads prevail, suggesting that the infighting was reaching unpalatable levels. Given the gravity of the situation, all parties felt it was best to have a cooling-off period.
The deal is still in sight, and oil is in a pretty good spot for 2021 with the vaccine roll out to push WTI to $60 despite the current level of OPEC+ disquiet, But the OPEC meeting is offering up a bigger speed bump than many had thought
The US dollar
The USD’s underperformance since the US election and the announcement of various COVID-19 vaccines has been stark. It is also reflected in an apparent shift towards much broader short positioning being built up against the greenback. But perhaps the market is starting to show more than a few stretch marks.
The 1.20 level in the EURUSD remains a bridge too far for the dollar bears and even despite some of the highest volumes in EURUSD into WMR we have seen since Jackson Hole (27AUG). (using EBS data), The double top at 1.2004/16 massive level down here in USDCHF (0.9000), and the USDCAD holding ground at 1.2950 again, for now, suggests the dollar is not about to roll over into year-end.
One would have thought with the heavy downpour of US dollar selling flows into month-end vs. the Euro, I expected a push to 1.2095 into the WMR fix (as per our buy signal from 1.1885-1.1910 last week). Alas, another disappointment at 1.20. It suggests the markets could veer back to a neutral view on EURUSD now and neutral on the USD overall. The supply/demand story should even out now with month-end over. I do not think the Fed will add accommodation with US stocks roaring above SPX 3600, so it is hard to see why USD continues aggressively lower at this point.
And with the year-end approaching, some bullish Euro traders might wait until the new year to build directional positions. And some justifiable concerns may hold the Euro back as the issue of currency strength may re-emerge as a theme within ECB rhetoric ahead of its December meeting.
The Malaysian Ringgit
The Ringgit has been trading quietly. Like most currencies directly buttressed by significant oil export quotient, the local currency market remains slightly jittery ahead of the delayed OPEC quota extension announcement, presenting a bigger speed bump than expected.
I think cooler heads will prevail, and Brent moves back above $50, supporting the MYR, but in the meantime, the MYR could take cues from broader US dollar sentiment.