Asia Market: Georgia on our minds

Market highlights 

• Georgia Senate election runoffs create tenuous start to 2021
• US stocks rebound after sharp sell-off on the first trading day of the year
• Oil prices surge after Saudi Arabia pledges to do heavy lifting on production cuts
• FX market knotted like a tightly coiled spring just waiting to pop
• Gold in a holding pattern

Markets

US stocks rebounded on Tuesday following a sharp sell-off on the first trading day of the new year, with investors training their ears and eyes on the Senate elections in Georgia that could determine the direction of fiscal stimulus and US tax policy. But it was the energy markets that provided the soothing balm after Saudi Arabia’s ground-breaking intervention on the oil markets overnight. 

The Georgia Senate election runoffs make for an even more tenuous start to the year with investors nudging ever closer to the Covid abyss, even if the US has passed peak vaccine euphoria as dreams of the efficient rollout are now replaced with the unfortunate logistical reality markets remain focused on the end of the tunnel, regardless of its length.

Georgia Runoff

The logical thinking is if the Democrats were to win both seats, the knee-jerk reaction would be for the Treasury curve to steepen on higher stimulus expectations. The 10-year yield will be able to gain, but without major adverse consequence on risk assets. It should support equity rotation, but not necessarily endorse at the index trade level, given tech’s high weight and the fear of industry-wide regulation and tax hikes. The dollar should come under further downward pressure, however.

But uncertainty is still the general worry out here over what direction a “blue wave” directional index bias veers. Would the markets focus on the possible boost to government spending, or don tin hats against the potential increase in tax and regulation? Or would the status quo trigger a relief rally by avoiding those tax increases or will disappointment on constrained fiscal stimulus reign supreme?

The bottom line is the market hates uncertainty, highlighted by the Cboe’s Vix index – which measures the expected volatility of the S&P 500 over the next 30 days – gapping above 28 in early trading before easing back to 25 as energy proved the volatility suppressant.

Oil Markets

Oil prices surged overnight after Saudi Arabia pledged to do a massive chunk of the production cuts’ heavy lifting by shouldering a voluntary production output cut by an extra million barrels a day, in what’s being described as a “new year gift” to the market by the Russian deputy prime minister. 

Oil prices surged more than 5% today on the positive outcome of the OPEC meeting. In a spearheading statement which is bound to win over many friends in high places at OPEC+ and stamp their leadership over the producer’s group, Saudi Arabia unilaterally decided to cut production by one million barrels a day for both February and March in an agreement…