This week is all about mega-cap earnings, but the early focus is falling on Biden’s agenda to support the economy, the power of the retail trader, and Merck’s COVID vaccine setback. Big tech has somewhat underperformed over the past few months and investors are trying to ramp up their love for FAANG stocks. Millennials relentless love for Apple, Tesla, Facebook, and Amazon and mounting COVID global lockdowns are simple reasons that are powering mega-cap stocks.
In what will be a steady stream of initiatives, President Biden’s “Buy American” plan is just one small part of the equation to fix the economy; the executive order will force federal agencies to buy US products and encourage more products are made domestically. This week will likely see more Republican objections arise and posturing from Democrats over Biden’s $1.9 trillion stimulus proposal. Stimulus will happen, but talks could linger all week long.
GameStop
The retail trader just picked a fight with Citron and won. Over the weekend, I saw a handful of retail traders on TikTok boasting about how GameStop was going to see crazed buying again. As someone who started trading stocks in the late 90s in college, I would always remember watching when the small retail trading groups would get crushed by hedge funds and savvy short-sellers. What happened with GameStop’s stock is a reminder of how times are changing. A new army of traders are not focused on valuations, but rather by momentum opportunities they see from Reddit’s Wall Street Bets, Youtubers, TikTok, or Robinhood. Top research shops will now have to consider how millennial traders are positioning themselves. GameStop does not deserve a valuation over $90, but that might not matter if influencers keep retail traders buying.
Lockdowns
Renewed lockdowns and restrictive measures globally are dragging down the European bourses. A steady stream of countries mulling travel curbs and delays with vaccines is taking its toll with European stocks. While the US is seeing cases mostly trend in the right direction, Spain and France are headed in the wrong direction. The holiday peak is supposed to be behind us, yet Western Europe continues to struggle with the COVID. Europe’s lack of big-tech and lingering COVID concerns are weighing on stocks to start the trading week.
COVID Vaccines
Merck
Despite the setback with Merck’s coronavirus vaccine setback, the innovation behind COVID vaccine is still encouraging. Merck threw in the towel after disappointing early trial data on their COVID vaccines. The bar was set high by Moderna and Pfizer, making the decision for the US drug giant easy to pull the plug. Wall Street took the Merck news in stride as a plethora of vaccines are still in the works, with some also targeting the new virus variants.
Moderna
Moderna delivered positive news that their COVID vaccine retains neutralizing against the UK and South African strains. The Moderna vaccine held up well against the UK strain and did see an impact with the South African one. The South African virus variant impact was a six-fold reduction in neutralizing titers. Moderna will work on a new vaccine which should not really surprise anyone.
US stocks softened after Dr. Fauci noted he is worried about delays to second COVID vaccine doses. Earlier, the world’s largest syringe maker announced they can’t keep up with Pfizer’s demand. Pfizer/BioNTech will ship fewer vials to account for extra doses.
Chicago Fed
The Chicago Fed National Activity Index posted a surprise increase in December as fifty-three of the 85 individual indicators made positive contributions. The index rose to 0.52, better than the consensus estimate of 0.10 and the prior reading of 0.31. The regional Fed surveys are coming in mixed but still overall positive. The Dallas Fed will be released later this morning and is expected to post a small increase.
FX
The euro is getting picked on today as Europe struggles on the COVID front. The love for US tech stocks is not helping flows too, but the main driver today is risk aversion as Europe struggles to show they have the COVID figures heading in the right direction. Two key economies, Spain and France are poised for greater lockdowns and the virus variants concerns remain elevated and likely to prompt further restrictive measures on any surges of new cases. It’s been a steady stream of bad news for the euro, starting with the disappointing German data and lingering, a lackluster vaccine rollout, and rising expectations of greater lockdowns.
Oil
Crude prices pared early gains from a double dose of bad news on the COVID front. Merck’s coronavirus vaccine failure and Dr. Fauci’s concern over second COVID vaccine doses were bad news for the short-term crude demand outlook. Earlier, oil prices were boosted on commitments from Russia and Iraq to reduce output over the next couple of months to make up for their noncompliance with the OPEC+ production cut pledge. Iraq will lower production in both January and February, while Russia is eyeing a 20% reduction of their seaborne exports in February.
WTI crude remains trapped in the low-$50s as short-term headaches to the demand outlook are offset by optimism the second half will be very strong. Crude does not want to break as air travel and business activity will come roaring back, but it seems vaccine delays may only push things back a couple months.
Gold
Gold prices initially climbed higher ahead of what is expected to be another dovish confirmation Fed policy meeting later in the week and as COVID vaccine and lockdown news bolster the prospects of more global fiscal and monetary stimulus. Gold should remain bid as short-term risks to the outlook are growing; vaccine delays on syringe shortages, Europe is likely to see more lockdown announcements, and ahead of the biggest earnings season week that is expected to see risk appetite supported by mega-cap tech earnings.
Ahead of the Fed’s two-day policy meeting, gold should settle between the $1,850 and $1,900 range. Gold’s outlook is still bullish mainly because of dovish commitments from Fed Chair Powell and Treasury Secretary nominees Yellen. The next couple of weeks are big for fiscal negotiations and that should be critical for gold’s short-term outlook.
Gold pared most of its early advance after the dollar mounted another rally following a steady stream of negative European news that sent the euro sharply lower.
Bitcoin
Bitcoin is rising as the “Yolo” generation continues to buy on any incrementally positive crypto news. Expectations are high that Treasury Secretary nominee will take her time with the regulation on cryptocurrencies and that ultimately that the first wave of changes would likely hurt the smaller coins first. Bitcoin is now comfortably above $34,000 and seems poised to continue to consolidate between the $30,000 and $40,000 range.
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