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Written by: Edward Moya | OANDA
US stocks are rocking in the new year, with all the major indexes hovering near record high territory. It is hard not to like equities as the economic outlook seems to be inching towards pre-pandemic life. The COVID situation is still bleak as the holiday surge will likely deliver one last peak in both new cases and hospitalizations. Vaccine rollout plans will also likely see tweaking, especially under a Biden administration. Halving doses, additional vaccines becoming available, and having CVS, Walgreens, and other pharmacies administer the vaccine will spur optimism that large parts of the country could see restrictions ease sooner.
Another healthy steam of M&A news is also helping keep Wall Street in a positive mood. Healthcare insurer Centene Corp agreed to buy Magellan Health for $95 per share in cash, a deal worth $2.2 billion. Brookfield Asset Management proposed to take Brookfield Property private in a $5.9 billion deal. Teledyne will buy Flir Systems in a cash/stock deal valued at around $8 billion. Steady deal flow will keep many investors aggressive to start the year.
The positive start for stocks will likely be short-lived as investors brace for the Georgia elections that will determine how much change we can expect from the Biden administration. The FAANG stocks could be hardest hit with a ‘blue wave’ since that will allow President-elect Biden to deliver with his promises of higher taxes and a tougher regulatory environment. Amazon, Apple, Facebook, Google, and Netflix are taking the wind out of today’s positive start.
US Data
Risk appetite got a tentative boost after the final US Markit Manufacturing PMI was revised higher to 57.1, the highest reading since September 2014. The Markit survey was somewhat mixed as the employment component impressed while supplier deliver time declined to the lowest reading since the series started. Supply chain disruptions were expected due to COVID and the largest rise in cost burdens since April 2018 will weigh on manufacturers.
US construction spending in November slowed down but is still heading higher. Private construction climbed higher by 1.2%, while public continues to remain steady. The winter months will trigger some softness, but will not change the mind of traders that housing remains the bright spot of the economy.
Tesla
Tesla shares are off to a great start following better-than-expected delivery figures for the fourth quarter that saw them just miss their 2020 goal of 500,000 vehicles. The road ahead for Tesla will be bumpier as their Chinese competitors also crush their sales numbers for last year. Tesla momentum appears will tentatively remain in place even after prices rose over 700% in 2020. It is hard to see how analysts can remain in the Tesla outperform camp, but following a strong finish and relentless Robinhood type interest, it seems the party can go on a little longer.
US Politics
In the chaotic last season of President Trump, the Washington Post released a recording that shows a desperate last attempt to encourage Georgia election officials to find enough votes to flip the state. The audio will leave a sour taste for many Republicans and concerns will grow that many Trump supporters may not be as motivated to show up for the Georgia Senate runoff races. Democrats are focusing on the future and will likely pass on moving forward with articles of impeachment.
In what was a surprisingly close vote, Speaker Pelosi was re-elected for a fourth non-consecutive term to head the House of Representatives. With the smallest majority in decades and as the pandemic disrupted some attendance, Pelosi got 216 votes while Republican leader Kevin McCarthy received 209. The Democrats are very fearful of the 2022 elections as Republicans seem in a good position to possibly win both houses.
The focus this week is mainly on the Tuesday Georgia Senate runoff races. Georgia residents appear motivated in deciding who controls the US Senate with a record 3 million early votes, roughly 39% of all registered voters in Georgia. For the presidential election nearly 5 million votes were cast, with Biden winning 49.5% of the vote against President Trump’s 49.3%. Since Georgia does not register voters by party, it is unclear how much of the early voting went to the Democrats and Republicans. The early voting statistics show that Republican congressional districts in north Georgia had a poor turnout, but that was somewhat expected as many Republicans prefer to vote on election day. The Democrats may also be optimistic that Black turnout was strong with early voting.
Wall Street is still pricing in Republicans to win at least one of the Georgia Senate runoff races, but confidence should be waning for that outcome.
Oil
The start of the new year is bringing lots of optimism on the crude demand recovery front. Crude prices have a lot or risk events to start the New Year. The obvious risk is will OPEC+ be too aggressive in returning more crude to the market. The other risk is will Democrats pull off a shocker and win both Senate races in Georgia, paving the way for a Biden administration to deliver more fiscal support that will send the dollar deeper into freefall and for a clean energy initiative that will curtail US production even further.
OPEC+ is dealing with a softer crude demand outlook to start the new year due to the highly anticipated post-holiday coronavirus spike. Vaccine rollouts have not been as successful for most of the world and that does not bode well for the case to hike oil production by another 500,000 bpd in February. The positive news for an improving crude demand outlook is China’s economic strength and cold winter that is driving strong demand for crude.
Over the weekend, OPEC Secretary-General Barkindo noted that many downside risks remain and that outlook for the first half of the year is mixed. It seems that given the uncertainty to COVID and a slowdown with US production, OPEC+ should be willing to hold off any increases in production. Even if the group decides to raise output again in February, downward pressure on crude should still be limited.
WTI crude was softer despite the strong dollar as the OPEC+ meeting showed the Saudis remained guarded and Russians were noncommittal. It seems the Saudis are pushing to punt another increase in production and that seems what the energy markets are expecting. Crude prices might still hold up if the group agrees upon an increase of less than 250,000 bpd in February.
Gold/Treasuries
Gold’s New Years resolution to return to record high territory got off to a great start. A dollar in freefall kickstarted gold’s rally and expectations are high that will continue with a Biden administration that includes former-Fed chair Yellen running the Treasury. Light at the end of the COVID-tunnel is driving the reflation trade and that is expected to be the catalyst that takes gold back to record highs.
It feels almost that we are waking up to a new world of inflation as the 10-year breakeven rate tests the 2.0% level for the first time since 2018. The Fed has made it clear they will allow inflation to overshoot their 2% and that will do wonders for the gold holders.
Gold appears to have got its groove back and should be eyeing the $2,000 level in the short-term.
Bitcoin
For those casual crypto followers, they are looking at their Bitcoin charts in awe as prices have surged above the $30,000 level to start the New Year. The surge above $30,000 occurred on Saturday and most of that move was attributed to the never-ending recycling of the institutional interest story. Bitcoin skyrocketed to $34,723 yesterday followed by a plunge of almost 20% exactly and has rallied back above $31,000.
Bitcoin volatility is here to stay and that should scare away many investors. The appeal of the recent Bitcoin rally was steady flows and healthy consolidations before massive price rallies. Bitcoin’s wild swings will likely spark interest into some of the other cryptocurrencies, such as Ethereum. Over the weekend, it seemed ambitious calls for Bitcoin to rally towards $50,000 became the consensus on Wall Street and that provided the last bit of exhaustion to this historic rise.
Bitcoin demand should remain healthy in the first quarter, but the growing hedge fund presence will make this an interesting ride. Following a significant plunge during a relatively healthy macro environment could lead to a healthy consolidation for Bitcoin.
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