US stocks are rising to fresh records as the focus switches from the US Capitol mayhem to fresh economic stimulus. Financial markets can look past the chaos now that President Trump pledged an orderly transition. It is hard not to like equities now that we are beyond all the big risk events: Trump's acceptance of the presidential election, a clear Senate outcome, effective COVID vaccines, and hints of Fed taper tantrum. An orderly transition for Biden means he can quickly implement his strategy for squashing the coronavirus, delivering more economic stimulus, and moving along his infrastructure spending agenda. The Democrats won the Senate by the slimmest of margins and that means Biden will not be able to deliver sweeping tax and regulatory reform. Investors may expect small caps to outpeform but do not have to abandon their FAANG stocks.
Facebook banned President Trump until his term is ends and Shopify took his e-commerce websites offline. Both Facebook and Shopify shares held onto their earlier gains and were unfazed on the ban announcements. Facebook has survived boycott threats in the past and right now it seems investors don't believe today's actions will become an issue. All eyes are now on Twitter and Alphabet's YouTube to see if they match Facebook's move.
Jobless Claims/NFP Preview
Financial markets showed little reaction to another elevated weekly initial jobless claims. Applications for unemployment benefits decreased by 3,000 to 787,000, slightly better than the consensus estimate of 800,000 initial claims. There is no doubt that the current virus surge will lead to further shutdowns and that will continue to keep pressure on the labor market.
Economists have a consensus estimate of a gain of 50k for the December nonfarm payroll report, with a forecast spanning -400k to +250k. Surging virus cases and fiscal support uncertainty in December weighed on hiring and traders should not be surprised if hiring turns negative for the first time since the April report.
Double dip concerns will only reinforce prospects for further stimulus now that Democrats were able to deliver a Blue Wave.
Today’s ISM Services reading looked better than it was. The headline ISM services index came better-than-expected at 57.2, higher than the consensus estimate of 54.5 and the prior reading of 55.9. Supply chain disruptions from COVID restrictive measures was the main reason the service gauge unexpectedly rose. Further COVID restrictions will weigh on the index next month.
The dollar is rallying as inflation expectations send Treasury yields higher and as leveraged- and real-money accounts rush to cover their excessively bearish greenback bets. Bets against the dollar became overcrowded and the dollar could see a substantial bounce here. No one doubts that the Biden administration will deliver aggressive stimulus packages in his first 100 days, but for many investors now is the time to take profits.
Crude prices are slightly higher despite a broadly stronger dollar as energy traders’ positioning play tug-of-war over looming global lockdowns and not wanting to be against the Saudis. The short-term crude demand outlook continues to deteriorate now that virus concerns have returned to Asia. Vaccine rollouts have disappointed but that is being offset by positive news that more vaccines appear poised to get the greenlight. Sinovac’s COVID vaccine proved to be 78% effective in a Brazilian trial and that is great news for emerging markets. If by the end of the first quarter the world has over 5 COVID vaccines being distributed, oil prices will be able to shrug off most of the short-term pressures on crude demand.
The gold market is caught deep inside ‘no man’s land’. One session gold is lower as yields rise alongside with the dollar, then the next one has gold bouncing back on the reflation trade. A Blue Wave was supposed to propel gold higher but excessively bearish dollar positions are getting covered and that will be a short-term headwind.
Gold is also seeing many institutional investors hop on the crypto bandwagon. The Bitcoin bubble is attracting tremendous widespread interest and that will hinder some of gold’s longer-term appeal. Eventually, cryptocurrency volatility will go both ways and that should bring many traders back to gold.
Gold is consolidating between $1900 and $1950 but eventually the prospects of more monetary and fiscal stimulus should have the bullish trend reassert itself.
Investors continue to hop on the cryptocurrency train which appears to be gaining more interest now that the US economy is poised to deliver more stimulus in Biden’s first 100 days. Bitcoin continues to make fresh records and is currently eyeing the $40,000 level. High-frequency trading systems may look to lock in profits if the rally loses momentum around the $41,500 area, which is the 200% Fibonacci expansion level of the near bear market collapse from earlier in the week.
The stimulus driver for Bitcoin is not going away anytime soon as COVID updates around the world show virus mutations and a slow vaccine rollout will force further restrictive measures globally, including Asia. Japan and China have cases heading in the wrong direction, while the situation across the US and Europe remain dire. Bitcoin is surging higher as rising COVID infections only means that governments and central banks will continue to remain aggressive with fiscal and monetary stimulus efforts.