Biden’s plain-speaking will return markets to reality

Markets are starting to adapt to President Biden’s plain-speaking on the seriousness of the combined pandemic/economic crises. This is quite a change from President Trump’s continuously upbeat message of the past 4 years.


Oil/LNG

Crude oil drifted lower, ending down $1/bbl at $55.41/ bbl as worries surfaced over the impact of new Covid outbreaks in China – and also helped to take LNG off its recent highs. But the damage to demand has already been done.

Biden's plain-speaking – Brent crude oil

✦  HIGHLIGHTS

  • President Biden got down to work quickly, using Executive Orders to advance his agenda
  • His tough line on the Covid crisis will likely reduce US gasoline, diesel & jet fuel demand
  • But the bans on new drilling on Federal land will have little impact in the short term, as drillers have stockpiled permits, and today’s prices are already supporting output
  • His move to rejoin the Paris Accord will also ensure that spending on renewables is a key part of the $4trn infrastructure package
  • Time is not on the USA’s side in reaching the Paris targets, given the lack of progress under President Trump
  • The Accord commits the USA to a further 12.5% cut in CO2 emissions from 2019 levels by 2025 – which is just 4 years away

WATCH FOR

Next month’s OPEC+’s meeting to start to realise that Biden is serious about ending the Oil Age.


S&P 500

The S&P ended up 73 at 3841 with the VIX volatility index down 10% at 22. Traders were in positive mood with the good start to earnings’ season, despite weak economic data from Europe.

Biden's plain-speaking – US S&P 500

✦  HIGHLIGHTS

  • Traders are currently convinced that Biden will find it difficult to pass his major policies, but the rapid confirmation of Defence Secretary Lloyd Austin may lead to a rethink
  • Biden’s acceleration of vaccination programme is also likely to receive widespread Congressional support
  • As we had expected, Biden is going to target the repeal of Trump’s tax cuts for the rich and corporations
  • The ‘All-news-is-good-news’ market mentality is also likely to come under pressure as the pandemic’s impact becomes more obvious
  • But for the moment, secondary equity offerings are running at record rates ($16bn YTD), reflecting investor appetite

WATCH FOR

Market confidence to be tested as global economic outlook assumptions degrade


Interest rates

The market held at the 1.09% level, and the MOVE volatility index at 43. Inflation bulls found it difficult to move rates higher on the back of weaker economic data.

Biden's plain-speaking – Interest rates

✦  HIGHLIGHTS

  • Yields on TIPS inflation-linked bonds remain low, not confirming the recent rise in 10-year rates
  • But investors’ risk tolerance is still high, with yields on junk-rated debt continuing to slide
  • Retail investors’ euphoria over the outlook for CCC-bonds meant their yields fell to just 6.42%
  • This move was quite a contrast with the rising yields on many investment-grade credits

WATCH FOR

The eroding outlook for the economy to dampen unrealistic inflation expectationss.


China

The joke in Beijing today is that the Forbidden City has been renamed the For-Biden City. But the damage caused to US-China relationships by the Trump administration means that major policy and trust issues remain.

Biden's plain-speaking – China

✦  HIGHLIGHTS

  • The former administration threatened to upend the decades-long “One China Policy”, how Biden deals with the Taiwan issue will be key
  • Trade tariffs still remain in force, but China’s trade surplus with the US actually grew in 2020 (US$ 317bn vs US$ 296 bn in 2019)
  • China did not meet all its Phase One trade deal obligations, due to the pandemic. This trade deal will have to be renegotiated
  • Beijing clearly welcomes the return to a multilateral cooperation model, most notably the US return to the Paris Accord and the WHO
  • Climate change offers an early chance for the world’s 2 main economic powers to work together ahead of the COP26 Conference in November

WATCH FOR

A return to Kissinger style “realpolitik” from the US , cooperation between the two superpowers where possible, disagreement in other areas, leading to more stable predictable markets.


Summary

Markets are starting to realise that Biden’s focus is on improving the lives of working and middle-class Americans. This is quite a change from Trump’s obsession with new S&P records.

Oil

S&P 500

Interest rates

Market view today

Some concerns

Some concerns

Expecting inflation

Our current view

Negative medium/longer-term

Reversion to mean inevitable

Expect long-term deflation

Positioning began

December 2020

December 2020

December 2020

Confidence level
Initial
Today

.

.

.

Relevant positioning

Cautiously bearish

Cautiously bearish

Neutral 10-year and longer-dated Treasuries

Confidence level: = 100%,  = 75%, = 50%, = 25%


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