An Instant Gratification Retreat

US dollar rises, equities ease

Whether the end of last week was a bit slow news-wise, an inauguration comedown, or just investors reducing risk exposure in their portfolios, financial markets limped across the finish line. Stocks and commodities eased, and on currency markets, the US dollar managed to climb for the first time in three days.

A similar tone is pervading Asian markets again this morning with the news wires carrying stories about vaccine delays and possible roadblocks in the Biden USD1.9 trillion stimulus plan. Regarding the former, it is an indictment of society in this digital hyper-connected world that issues with vaccines are weighing on sentiment. The arrival of Covid-19 vaccines is not like Amazon Prime, click a mouse, and the order arrives a couple of hours later in enough packaging to deplete the Amazon rain forest.

The entire value-chain is fiendishly complex from manufacturing, to transport to deployment to injection. Doubly so as all vaccines on the market so far are double-shoters. The world is quickly discovering that any hiccups along that chain have knock-on effects along the rest of it. In this respect, a modicum of common sense should highlight that vaccines are not an instant panacea to the world’s ills, and realistically are not likely to be for another six months.

Similarly, the much-mooted Biden USD1.9 trillion stimulus package has been naively priced by markets as sailing through the Senate unimpeded. All the while, blissfully ignoring the filibuster, reconciliation and the Byrd Rules. Noises from Washington DC suggest that President Biden’s honeymoon won’t extend to Senate Republican’s handing over ten votes to ease the package though on a 60-40 majority. The 60-vote majority can be slimmed to a 51-vote majority through reconciliation, breaking down the bill’s constituent parts, flushing them through a committee and passing that bit with a simple majority. The Byrd Rule means that state and local government aid, by my interpretation, will need 60 votes regardless.

Financial markets are better than ever at group-think myopia these days, ignoring the story’s parts that don’t fit their chosen narrative. In this case, the stimulus package’s passage, as highlighted by the author previously numerous times, will be longer and more complicated than the street has expected. I highly doubt that the USD1.9 trillion headline number will survive the Senate either. That result of this dawning of reality should be the dollar strength and slightly weaker equity and commodities markets for the first part of this week.

One thing for readers to look out for is the Johnson and Johnson Covid-19 vaccine update. J&J expects to release preliminary data by the end of January regarding the efficacy of their vaccine. If the herd are looking for another reason to load up on the great rotation, global recovery, buy everything trade, positive results from J&J could generate it. Why? Because the J&J vaccine will be a single shot dose logistical game-changer, assuming they can produce enough of it.

This week is a bit more exciting than last on the data front in Asia with South Korean, Taiwan and Philippines GDP and China Industrial Profits and Japan Retail Sales. The US releases Q4 GDP, Durable Goods and Personal Incomes data. Europe releases Consumer Sentiment with Germany releases its IFO Survey and Q4 Flash GDP. We also have earnings from US tech heavyweights Apple, Microsoft and Facebook, as well as Tesla.

The one ring to rule them all though will be this week’s FOMC meeting, with the Federal Reserve expected to leave the Fed funds rate unchanged between 0.00% and 0.25%. It’s USD120 billion per month bond, and the MBS buying programme will also remain intact. The decision and press conference occur in the early hours of Thursday for Asia. Among the more hair-brained ideas I read over the weekend, the Fed might signal an early taper to the QE programme and rate normalisation as “vaccines” change the game. That brings us back to instant gratification again, with monetary policy now an Amazon Price one mouse click same-day delivery change away.

Although the Fed should be comfortable with the move higher in US yields, Chairman Powell needs to squash aggressively any such taper thoughts. With the world now more addicted to GFC zero per cent money than ever – realistically, no major central Western central bank “normalised” policy – a taper tantrum now will make the Yellen one look like a kids tea party. With markets fretting about US 10-year yields climbing above 1.0%, still virtually free money, the Fed needs to knock this one on the head and quickly or face some bitcoin-like volatility.

With the week’s event-risk weighted toward the back end of this week, and with no clear direction from Wall Street Friday, Asian asset markets are likely to drift today.