Democratic Party Win Georgia Senate Race - What Does This Mean For Markets?

Okay, a very good morning. It is Wednesday the 6th of January of 2021 and first actual video briefing of this year, so apologies for the audio only up until this point. But I have a special guest, our Head of Trading, Piers Curran. Piers, how are you?

Good morning, very good, thanks.

Good stuff. So what I thought would be a good thing to do here is to really get your opinion on a couple of key themes, but incorporate that around what I'd normally do for a briefing, which is focus on some of the major themes that are happening that are important for markets at the open this morning. So we've got a little bit of discussion about COVID both in the UK and Europe. I'll get you up to speed what some of the latest headlines are, and it'll be good to see your take on the kind of vaccine rollout, things of that nature. We've got the Georgia Senate runoff, and that has had a meaningful impact actually on markets this morning because T-notes are down about 16.5 ticks, which is pretty decent move actually in overnight session. And the NASDAQ's a little bit underperforming comparative to, you know, the Dow's up 127, the NASDAQ's down 156, which I thought it's quite an interesting move, which a lot of people are anticipating if the Dems win, which we can discuss in a moment. And then talk a little bit about OPEC and the surprise announcement out of the Saudis yesterday. So That's what's on the agenda. So kicking things off then, we're going to jump straight into the Georgia Senate runoff because I think that's the most meaningful thing that's developed really overnight. And as I said, there's been a bit of reaction seen in different asset classes here. So to get everyone up to speed, the Democrat Raphael Warnock edged ahead of the incumbent Senator Kelly Loeffler in one of Georgia's two Senate runoffs. It's looking pretty good for Warnock at the moment, 50.4 to 49.6% is the split at the moment. It seems awfully close, but actually in this world for this type of subject matter, that's looking fairly as conclusive as it can in the political world of 2020 and 2021. John Ossoff, the Democrat seeking to unseat David Perdue, trailed the incumbent by absolute whiskers. It's kind of like a thousand votes at the moment, so it's basically 50-50. The latest I've seen now is a couple of the agencies have declared actually the Dems have won both. However, the final result is yet to be known, and kind of like Trump and Biden, as we know last year, it could take a little bit of time for definitive confirmation. Some strategists have argued that a Democratic double win— this kind of goes back down to this blue wave idea— additional stimulus, tax hikes, regulatory change And so really want to get your take on that and what you think about what this could mean going forward.

Yeah, absolutely. I mean, it's quite definitely key with that, with that final remaining seat. I think even though it's a whisker, I think the counties that are remaining to kind of declare are kind of more Democratic-leaning, which is why you're getting people now saying, right, actually we are going to get this, this, this blue wave, so to speak. I mean, yeah, I mean, let's look at the charts because I think that the most important chart— I'm just going to bring up charty notes here. Um, and then we'll have a look at the NASDAQ in a minute. Um, this is really important for me. I mean, as you can see, quite another kind of extent. We had a big move lower yesterday, but obviously that was still within the ranges of the, uh, the kind of Christmas/New Year week. Um, but a real stretch lower today. And, and as we break down below that low that we had on the 23rd of December, then you can see the massive level here, this key, key level. It's the November low. And the other thing— we're looking at price here— the other thing that's really important is that this is 1% on yield. So as prices drop, yields are rising. So we're hitting the 1% handle. Just to get this in perspective, because this looks incredibly negative here. But if I just go to a longer time period, do understand that this is actually just the This is the bottom of the sort of relatively tight consolidation phase that we've had since the big explosion higher that we had earlier in the year off the obviously onset of the pandemic. And so this is really key because it's not just that November low there, but you know, you've got this low from back in June as well. And this is really important. And if we get a break here, then, then, then this will get interesting. It gets interesting for a number of factors. And the reason why we're getting this move is that whole idea of the blue wave. It's, as you were saying, it's the biggest stimulus package that the Democrats will be able to get through Congress without the Republicans being able to block it. Obviously, you've got then other issues about perhaps some regulatory factors coming in and maybe higher taxes further down the line to kind of pay for all this stimulus. Of course, this means more borrowing. There'll be more supply of T-notes. This is helping to push prices lower. But with regards from a yields point of view, it's that whole, that whole inflationary story comes back to the fore. Right. People were talking about this around the election time. If there's a blue wave Biden win, then this with a bigger stimulus, this will help to fuel a reflation story as we go through 2020 and 2021. And indeed, actually, The 10-year breakeven inflation rate at the moment has just gone to a new 2-year high this morning. So you're just getting a little bit of a re— sort of attention back on this re-inflation story. Now, why is this important? Because if that's true, then yields will rise. Okay. If yields do rise, then if I look— if you look at Look at T-note— sorry, look at the S&P here. The S&P is kind of right up at the top of all-time highs. The all-time highs were set at the start of this week, another little print higher. But we're kind of up around here. So you've actually got flat on the day so far on the futures. Got a nice sort of doji here. But if you look at the NASDAQ, then this gets a bit more interesting because the NASDAQ actually is printing down so far today. And in theory, what will happen here if yields do continue to rise, then this is potentially much more negative for the NASDAQ than it may be for the S&P. So it might be odd that people are thinking, well, hang on, if you've got the chance of bigger stimulus, shouldn't that be positive for stocks? And it certainly is for some stocks, but then it's not for others. And this is the thing about the tech sector particularly. That's been on fire as we've been through this COVID 2020. And one of the reasons is that yields hit rock bottom. Now yields are rising again. One key thing here is a lot of these big giant tech firms are carrying massive cash stockpiles. And the— so we're talking about future cash flow here. When yields are really low, the value of this cash in the future is higher. And that's helped to fuel this Nasdaq rally. What's going to happen now if Biden wins and you get this reflation story and you get higher yields is these future cash piles become less valuable, which will negatively impact on the Nasdaq. Plus, on top of that, you've got the concern about increased regulation in the tech sector. And these two things in particular are why you're going to get the Nasdaq underperforming. If this story kind of plays out, obviously we still need to wait for that second seat to be declared in the Senate for officially that to be a kind of blue wave scenario.

Do you think there's much— when we're looking at the politics specifically, let's say the Democrats pick up both these Senate seats, there's a blue wave, it is still relatively tight and within our own political party there can obviously be left and right leaning members. Members. And if there is quite a left-leaning policy that wants to be adopted by Biden, wouldn't take a lot for it to be blocked. So is there a little bit of— there's obviously a very important technical area you just showed on the keynote, which in itself a breach would likely create a fairly meaningful move there. But do you think there's any kind of short-term reaction to, oh, wow, this has happened, to then the realization that, Well, perhaps it's not going to be crazy levels of types of policies because it'd be hard to still push them through even with full control of Congress.

Yeah, I know what you mean. I mean, that control of the Senate would be on an absolute knife edge. You only need one, literally one dissenter. And then, of course, that majority goes. And it's not even a majority, right? It would be 50-50 and with the vice president carrying the overriding vote. So it literally couldn't be a more slender sort of majority.

So if I was a Democratic kind of young gun in the party looking to make a bit of a splash for myself for the future, I would see this actually quite good opportunity for myself to cause perhaps a little bit of complication to make sure that I can kind of secure what I want.

Yeah, but I'd say for the, I'd say for the short term, yeah, look, we weren't expecting this. If you go back a month, right, like in that kind of post-election post-presidential election sort of aftermath, it was like, oh God, this, this is closer than we thought. It turned out all right, Biden's kind of striding away with it, but for a period there we thought, hang on, this is a lot closer. And then we were worrying, well, there's no chance of this blue wave. I mean, no one's been talking about blue wave for ages, right? So actually, the, the mindset has shifted back. Okay, this is happening, and that is positive. And I think that certainly in the early weeks and months as Biden, you know, kind of goes through his inauguration in a couple of weeks, and then we actually get this Democratic machine kind of in control, then I think— I don't think you're going to get many dissenters to start with. I think, sure, as we get further into 2021, that might become a risk, but I think the parties are so divided at the moment. Politics is so bipolar at the moment that for a Democrat to go, actually, you know what, I'm going to vote with the Republicans, because of that divisiveness, that's a big gap to jump, and I think that's another important thing to put into the mix there.

Okay, well, look, let's leave these charts for a moment and let's move on then to a different subject matter. Let's talk about COVID There's obviously been some significant developments, particularly here in the UK where we're based, but let me give you an up up to speed on what some of the data there is, and then in Europe, and then it'd be good to get your kind of comment on that. So the acceleration we've been seeing in case rates in the UK, obviously very sharp post-Christmas, New Year, and so on, so likely to move even further north, resulting in this Tier 5 status at the moment. One in— the new strain has been a key culprit of that, meaning that one person in every 50 now in England now has COVID-19. That goes down to 1 in 30 if you're looking at London. 1.3 million have had vaccine shots. That includes about 20% or so of over 80s, and this is in context of one of the things that I was talking about a lot yesterday's briefing was about the kind of ambitions that governments, not just the UK but Europe and the US, and how they've, they've kind of moved the goalposts several times on the speed of the rollout of these vaccines on the program. So Johnson's goal here is to vaccinate almost 14 million people, the highest risk, and carers by mid-February, and that's the kind of timetable then. I think it's half-term then, the week around the 22nd, when they'll look to hopefully loosen the restrictions as to plan, but we've obviously been here many times before when the dates kind of have rolled over. A couple things here. The Guardian have reported this morning that COVID vaccine rollout might not hit target pace for another fortnight, for a start, whereas over in Europe at the moment, if you look at someone like Germany, for example, they've only immunised 0.3% of the population. So people have criticised the UK and US for being slow, They've done 1.4%. Germany have only done 0.3%. And Germany yesterday prolonged their lockdown till I think it's the end of this month. So yeah, what's your take on that and how markets are kind of— I mean, equity markets, although they've shown a bit of weakness since the beginning of this week, particularly on Monday, they're relatively high still. So yeah, what is this, a cause for concern, or is it something you're looking at?

It is, it's a really difficult one, isn't it, because, you know, on the one hand you've got the vaccine rollout starting, albeit some might argue false starting in terms of the speed of the initial phase, but then on the other hand— but still, look, vaccine being rolled out, and so the idea, great, perhaps this is the beginning of the end of this kind of COVID situation, at least for now, which clearly is a positive, but But just as you're getting this started, you're getting further lockdowns because you're getting cases ramping quite aggressively higher, you know, in the UK and now across Europe. And this new variant is— and how do you play these two conflicting factors when it comes to thinking about how stocks might perform? I might bring up a chart here whilst I'm talking. I mean, you mentioned Germany, who are way behind the UK, although I say way behind, I mean, 0.3 percent of the population vaccinated in Germany compared to 1.3 in the UK. Don't, don't forget that both of those numbers are tiny, all right, these are, these are minuscule numbers, all right, fine, 1.3 is higher than 0.3, but let's be honest, both are really small. And, but look at, this is the DAX, and the DAX, who you might say, where you've got Germany literally announcing an extension of their lockdown last night, plus the fact that, as we've just said, their vaccine program has got off a lot more slowly. And yet here's the DAX. I mean, literally this morning. Yeah. Well, sorry, this is a little bit off. This is on a weekly chart. Let me go to a daily chart. I just wanted to get the high in place. So on a daily, we're not printing new highs. We did yesterday. But let me go back to the weekly because this is more important because technically we got this big top back in February. And so, you know, we have seen DAX make new all-time highs this week despite all that negative news. And I think what people are doing for now, they're happy to look through this latest surge in cases and unfortunately then the associated follow-on ramp-up in death rates that we see. They're prepared to look through that on the belief that by the time we get to the spring, there will have this vaccine— you can have a double positive, which is that the vaccine rollout hopefully should have gathered momentum and we're getting millions of people vaccinated per week. And then number 2, the weather improves. And as we saw in the summer of 2020, of course, that helps with, with the virus. And then you're going to be able to see in the spring and through the summer, you know, a significant enough portion of the population being vaccinated to avoid another winter spike at the end of 2021. So people are looking through this current, what looks to be, you know, aggressive exponential increases on the belief that it's going to be short. So now you're going to get negative impact. We're going to get a worse economic growth situation in Q1 of 2021 than we had previously thought, and previously thought literally just a month ago. And that's because lockdowns have obviously come in, um, but people are willing to look through that. Now it's all going to be about clearly the vaccine rollout and And the reason for some of the delays, I mean, to be fair to politicians, this is an absolute Herculean project that they're trying to get underway here. And you could argue, well, they should have been planning for this for months and months and months and months and months. And of course, they have. But some of the reasons for the slow rollout, stuff like the little glass vials that the vaccine actually gets put into, well, now there's a global shortage of those. Of course there is, because suddenly you've got all these big healthcare companies creating loads of— so you've got several issues that are several bottlenecks, let's call it. What I would look at is the testing as a kind of case study. The speed of testing in the UK was really slow as we went through the summer, and then actually suddenly ramped up quite aggressively once they got there. Their act together and once some of these bottlenecks were shifted, it did then actually rapidly increase. And I, I would say we're going to hopefully see a situation like that. So I think mostly traders are looking beyond this current uptick in cases. They're looking beyond the slower than expected rollout of the vaccine on the understanding that things will sort itself out. And by the spring, we really will be able to see these global economies opening up, or at least the developed economies opening up. You know, you've got to remember the emerging markets are kind of further back in the queue when it comes to getting these vaccines, but I think the developed economic world should open up as we come through spring and summer, and that's why markets are still priced at their highs.

I mean, one thing here is there— at the moment Europe have been really focusing on the vaccines from Pfizer specifically and BioNTech, not so much AstraZeneca, which obviously the UK were the first to kind of push through, and that's been rolled out since, since this week on Monday. But shots in Europe, mainland Europe, from AstraZeneca are not going to be available for a number of weeks at the very earliest. So does that—

I mean, yeah, I think that is a factor because obviously the Pfizer one obviously is going to be stored at a much lower temperature, which just clearly makes it, you know, really difficult to roll out rapidly because there's another massive bottleneck right there. I mean, how many have how many vaccination facilities have got refrigeration equipment that's capable of storing this stuff. So there's going to be another big bottleneck with the Pfizer one. So look, even though the AstraZeneca one, a couple of weeks, I mean, look, we've been in this pandemic for 12 months, right? 52 weeks almost. So another 2 weeks, think about it from an economic point of view, another 2 weeks, all right, you wouldn't, it's not ideal, But in the grand scheme of things, it's not that big an amount of time. And anyway, in another 2 weeks, some of these bottlenecks that's holding back on the UK side hopefully will be alleviated. And that will help, you know, have a more rapid uptake and roll out the Astra vaccine in Europe. So that's, that's the way people are thinking. But it could, it could turn and it could be wrong. So this is why we're monitoring, obviously, the big stories now. You know, I know we've been obsessed about cases of COVID and deaths of COVID Clearly that's been the focus. I think actually 2021, big focus isn't going to be that. It will be now that the new big figure is number of people vaccinated each day.

Yeah, of which I'm pretty sure I read that there's going to be a Monday weekly update on that.

Yeah.

Which I guess is a bit of a double-edged sword because from a public perception it's kind of It's transparency, it's up to speed, people know where we're at. But from a market's perspective, you kind of then, yeah, you're on the hook a little bit there. You've got to start meeting your expectations, I guess. So, well, let's, let's, let's move off that point and let's, um, let's look at a different, different area now. Let's talk about OPEC+. So as we know, then they've moved now to sort of semi-annually given the fluidity, I guess, of the global environment at the moment with COVID They're going to meet every month, and they had that meeting yesterday. And what we saw was a surprise decision from the Saudis, where they surprised the oil market with a large reduction in oil output by 1 million barrels per day for February and March. Most people were just kind of going into this, just, okay, yeah, there's a bit of disagreement between Russia looking for a 500,000 increase But all in all, we think that they'll get put down, and they'll just hold pat as where they are. And then Saudi come out with that information, oil prices, WTI moved up to $50. Russia, Kazakhstan, meanwhile, were allowed to bump up their output by a modest 75,000 in February and a further 75,000 in March. So those numbers are incredibly small on the latter. But obviously, Saudi are doing the complete opposite. So What do you read into that from an OPEC perspective and a price perspective?

Well, here's the chart. And as you're saying, you know, an explosion higher yesterday off the back of this news. And we, and we kind of took out this key top. This is just a 1-hour chart, by the way. Sorry. So just looking over the last week or so, we hit this little top start of the week, just shy of this $50 handle. And then the big news. And then we're up here and we're above. We've been trading above $50. I would say, to put this in perspective, this is the most surprising OPEC meeting I've seen since November 2014 in terms of the actual outcome compared to kind of what we were expecting. When I say 2014, if you go— but I'm going to go back way back on the chart here to kind of bring that in. I know, just kind of ignore this crazy negative print that we had back in April. But let me just kind of get that out of the way, actually, just to— and so back in 2014, you might remember, this is where the Saudis and OPEC decided, right, we need to take on the shale industry in the US. And to do that, we need to drive prices lower and to make oil production, the more expensive oil production from shale, economically unviable. And so Saudi flipped and actually said, even though price was dropping sharply, they said, you know what, we'll come and we're going to increase production. This was a big surprise and it caused a big move. I can't get my— I just can't get my head around what's happened here. I don't get— let me go back to the 1-hour chart. I'm really shocked. I'm trying to understand Saudi's strategy here, because on the one hand, this is definitely negative for them and positive for everyone else, because they're saying, all right, look, guys, we'll take the hit. We're going to cut by a million to prop up prices, which will benefit all you lot because you're not cutting production. Oh, Russia, yeah, yeah, we don't mind, you can increase production. It's far removed from some of the decision-making we've seen in recent years. And so it's almost like the best Christmas present, the best sort of New Year present that Saudi could have given. It's interesting because at the same time, the Saudis have also kind of re-engaged with Qatar. So politically, there seems to be— I don't know, it's almost like they've woken up at the start of 2021 and said, you know what, let's change. Let's just kind of change our direction here, and let's actually go now in a different direction. And that might have kind of contributed to their decision here on oil. But so I'm really, really shocked, as you can see the market is. So what happens here on price? Well, Again, it's slightly difficult because you could— there's always those glass half empty analysts who will say, well, hang on a minute, why have they done that? Surely they know something we don't.

Right. And on that point, Goldman Sachs last night said exactly that. They see the surprise move as a signal oil demand is to weaken. And subsequently, GS have cut their oil demand forecast for January and February. They also said the transition to a probably less friendly US administration might also have led the Saudis to adopt a more supportive stance toward other Middle East producers.

Right. So look, you've got surprise extended lockdowns in Europe. Okay. That wasn't in the equation a month ago. And clearly, from an oil demand point of view, that's definitely very negative for the short term. OK, so it kind of makes sense from that point for Saudi to go, all right, yes, demand in the first 2 months of 2021 is going to be a lot less than we expected. Right, let's cut production to make sure we're controlling price and keeping it up here. That makes sense. What doesn't make sense is that the rest of OPEC weren't particularly keen. Russia actually wants to hike. And what, what further doesn't make sense is the Saudis went, all right, then fine, 'Well, cut. You guys don't have to.' That's the big shift here in the dynamic between these parties, where the Saudis have said, 'Look, we'll take the hit.' So look, it could be— there's definitely going to be less demand in the first 2 months than we had anticipated because of these lockdowns. That's for sure. Goldman's are saying, 'Well, look, it's a chronic drop in demand way beyond anything that we were concerned about. That's why Saudi have been forced into this incredibly unusual move. And I guess time will tell. We'll find out. But, you know, in the meantime, if there is a crash and a chronic lack of demand and that extends, well, then, you know, maybe you're going to get the other OPEC nations, you know, on board with extending cuts. But I think for me, from a price point perspective, look, we're up around $50. Today's really important. What happens at $50? Now we're here. You can see it's created a little bit of a We hit $50 at 3 PM yesterday. If I go back to a weekly chart, this is the highest price points that we've seen since February. You got key bottoms throughout 2019 at this level. I don't need to tell you how important $50 is as a price. It's obviously massive. That's why today and this week to a degree are really important. What happens now? We're at $50. Do we get a break of $50 and does that become a key support level, or is $50 a resistance barrier and we kind of pull back in? And I think personally, I think we'll probably tick higher. We're also getting dollar weakness to add into the mix. So as a result of this kind of Biden situation, you're getting another extension of the dollar weakness situation, which is a positive for oil. If I quickly switch over to to the euro-dollar here. We've got this kind of key break of the trend that everyone's been talking about. Well, where do I draw it? You could draw it there, really. So you've got a key break here, and then people are eyeing up the 1.25 handle, of course, and that kind of top that we had back in 2018. And so you've got further extension of dollar weakness, which definitely also helps to support oil up here. So my view is that really, real surprise from the Saudis. And in the short term it may well see us drift up above $50. Do we stay above $50? That'll be more about the vaccine rollout and how effective it is, and therefore how quickly economies open up again, and then how quickly that whole demand story turns more positive.

Okay, great. Well, look, this, um, just wrapping things up then, just to summarize the rest of the day going forward, we've got the EU-UK service PMIs. These are final readings, so not likely to be market moving. You've got the German state CPIs. Anything there you would look at? I mean, they were obviously negative previous months. Yeah, so I think inflation figures in Europe—

I think it's too early for Europe to really start to see any evidence of this re-inflation story that I mentioned earlier. I think you're going to Certainly the US will be leading that. So I think— I don't think you're going to see anything different in these regional German CPIs yet. So I don't think this data will cause any surprise.

Okay. And then we've got factory orders this afternoon for the US, the oil inventory numbers following the APIs last night, which probably are insignificant to the decision yesterday, as is passing. And then we've got the FOMC minutes this evening. But one final question for you then. Bank of England Governor Bailey is speaking later, but this is just in front of the Treasury Select Committee about the Financial Stability Report, so it's kind of an off-topic thing that's not normally market-moving. Yeah, we just had Brexit and the rates market is showing a little bit of apprehension at the moment given the lockdowns and the UK-specific COVID situation and this idea of negative interest rates is kind of re-emerging a little bit. Any thoughts on that at this point?

Yeah, firstly, I don't think he'll talk about that today. So I mean, I don't know, he's still relatively new as the governor, so I guess we're not quite as certain about that as we might have been if, let's say, Carney was in the seat. But, you know, these guys are professional. He's not going to be— he's not going to be drawn into making comments on that today because that's not the topic. So I don't think we're going to get any market-moving events due to UK monetary policy information flow today. But yeah, more broadly, negative rates, I mean, I don't know, it's a hard one. And I always go back to the point that for me now as a trader, do I care about whether the Bank of England go negative on rates or not. Do I care? And to be honest, no. And that's because if they do go negative on rates, all right, that could be a symbolic, obviously, clearly historic moment. But does it really change anything? You know, other European countries have had negative rates for years. Does it really change anything in the short to medium term? Not for me. And for me, without a shadow of a doubt, it's not In the UK, monetary policy is not a big factor when I think about how markets are going to behave this year. It's definitely about— it's definitely about the vaccine rollout. That's it. That's the big ticket. It's the vaccine rollout. You could— it's crazy to say, but we've literally just had Brexit. And you know what? Doesn't matter.

Yeah.

From a market's point of view, Certainly in Q1 of 2021 and beyond, just, it just pales into insignificance alongside whether this vaccine is going to get rolled out effectively or not.

On that note, Piers Curran, Head of Trading at Amplify Trading, thank you very much.

Thanks a lot.

Enjoy the rest of your day. All right, thanks very much, guys.

Cheers, bye.