Waiting for Biden – US$

Waiting for Biden

Markets were range-bound as investors prepared for a quieter, more serious, Biden presidency after the tumult of the Trump years. With top Republicans like Liz Cheney calling for a return to traditional Republican policies, the failed insurrection means he now has a much stronger hand in Congress.


Oil/LNG

Crude oil had a relatively quiet week, finishing up 43c at $56.42/ bbl.  Very cold weather and shipping delays have taken Asian LNG prices to a record high of $32.5/MMBTU – and are already slowing the Asian economy – which has been key to the recent rebound.

Waiting for Biden – Brent Crude Oil

✦  HIGHLIGHTS

  • Cold weather has hit Asia hard. Beijing has its lowest temperature since 1966, Tokyo has a state of emergency, and India is also hit
  • As Reuters notes, Asian governments have allowed consumption to soar without adding necessary infrastructure
  • Shortages have been worsened by Japan’s closure of nuclear facilities post-Fukushima, and China’s switch from coal to gas
  • Shipping delays at the Panama Canal add to the problems: Asian LNG tanker rates have doubled in January to $300k/day
  • Essentially, today’s extreme weather has brought a long-developing crisis to a head, with storage/gas reserves overwhelmed
  • The crisis will have a major impact on Asian economies, which were already slowing ahead of Lunar New Year next month

WATCH FOR

Oil demand across Asia to be hit as the crisis slows industry and transport demand.


S&P 500

The S&P ended down 57 at 3768 with the VIX volatility index slightly higher at 24. Details of Biden’s $1.9tn recovery package confirmed the new focus on fiscal rather than monetary policy – which may well prove bad news for today’s market bubble.

Waiting for Biden – US S&P 500 Index

✦  HIGHLIGHTS

  • ‘Buy on the rumour, sell on the news’ defines a weak market, and markets duly sold off once Biden’s plan was announced
  • Investors are starting to realise it may be a long road to recovery, and that corporate and high- earner taxes are likely to rise
  • Speculative call option volume remains at high levels, but longer-term investors are planning for the need to pick new Winners
  • The FANGMGs are likely to see growing pressure to introduce normal editorial controls on their platforms
  • This will add to their costs, and reduce their ability to generate revenues and eyeballs by stoking division in the population
  • Progress on vaccination is likely to become key to investor sentiment as the impact of the lockdowns mounts

WATCH FOR

Investors to start to realise the implications of Biden’s focus on fiscal rather than monetary policy after Wednesday


Interest rates

The market stabilised at the 1.09% level, and the MOVE volatility index at 45. Contrary to market expectations, the Treasury auction of new 10-yr notes saw strong demand on Tuesday, negating inflation bulls hopes for higher yields.

Waiting for Biden – US treasury interest rates

✦  HIGHLIGHTS

  • The 10-year rate auction was covered 2.5x to the surprise of inflation bulls, who had hoped for higher yields to be needed
  • This adds further support for our view that the dollar is preparing to rally rather than collapse
  • Municipal bonds also rallied in the week due to hopes of support from the Biden recovery package
  • A stronger dollar would likely reduce investors’ hopes for higher inflation and higher bond yields
  • News of weak retail sales also damped investor euphoria that a V-shaped recovery was finally underway

WATCH FOR

The potential for consensus thinking to change on the imminence of higher inflation and bond yields.


US$

Hedge funds have been happily selling the US dollar and buying commodities for some time, creating the illusion that a strong economic rebound is underway.

Waiting for Biden – US$

✦  HIGHLIGHTS

  • The US$ Index (DXY) hit a peak of 104 in 2017, and has since fallen to 90
  • The hedge funds theory is that a cheaper dollar makes commodities like oil and others cheaper for the rest of the world
  • But the theory ignores the impact of the pandemic, and assumes central bank stimulus will enable a V-shaped recovery
  • As the chart shows, the Index is now reaching a critical point at the 90 level, which has provided support in the past
  • Talk amongst currency traders is now starting to focus on the idea of a “dollar bounce” based on the start of the Biden Presidency
  • Traders love volatility, and hedge funds would happily embrace the idea of Biden’s achieving a return to cross-party government

WATCH FOR

The dollar Index starting to stabilise at the key 90 level, and short interest declining.


Summary

We continue to expect the Biden era to mark a return to more consensus politics in Congress, and a rethink of policies which have supported the 1% at the expense of the other 99%.

Oil

S&P 500

Interest rates

Market view today

Positive

Wildly positive

Expecting inflation

Our current view

Negative medium/long-term

Reversion to mean inevitable

Expect long-term deflation

Positioning began

December 2020

December 2020

December 2020

Confidence level
Initial
Today

.

.

.

Relevant positioning

Neutral Oil – Brent/WTI

Neutral major Western market indices

Neutral 10-year and longer-dated Treasuries

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


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This Research Note has been prepared by New Normal Consulting GmbH for general circulation. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. New Normal Consulting GmbH do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, New Normal Consulting GmbH does not accept, and disclaims, all liability for loss and damage suffered as a result. The pH Report and pH Outlook are published by New Normal Consulting GmbH.
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