Risk appetite slows down in the last days of the week as markets rethink the impact of the stimulus. Central banks maintain the status quo in their monetary policy meetings with hawkish tones. What are the core points of the week and risk drivers going forward?
After plummeting across all the sessions on Thursday, the dollar index is recovering significantly right into the entrance of Friday’s London market. The currency index bounced to 90.23 in the early hours as risk-off threatens to end the week. The move is seen across the board but mostly on AUD, CAD and NZD which are high-beta currencies. Euro trades below 1.217 resistance. It’s being pressured to 1.215 as the DXY strength cuts across. USDCAD has jumped over 100 pips since yesterday’s flash dip to 1.2588. AUDUSD and NZDUSD have both dropped over 50 pips. USDJPY and USDCHF are the least moved as risk sentiment is the major underlying driver in this whole show.
The stock market is not left out of the show. S&P 500 has shed almost a third of the week’s earlier gains. Biden’s inauguration on Wednesday drove Wallstreet stock indices to fresh highs. This week so far, NASDAQ, S&P500 and Dow are still net positive by 4.2%, 2% and 1% respectively.
Meanwhile, the effect is more devastating on the European stocks as they are about to shed all of this week’s gains and perhaps close the week negative. Lockdown extension amid the virus escalation is threatening to market risk in the zone. However, Asian stocks are displaying mixed reactions to the current risk sentiment.
Commodities & Cryptos
Commodities have been mixed. Gold and Silver have stayed rangebound since the bearish Asian session while the oil market remains downbeat. Meanwhile, the crypto market remains in the bearish phase. Bitcoin dipped below $29,000 (lowest in over two weeks). However, there has been a minor resurgence for Bitcoin to $32,000. It remains to be seen whether the low of the current bearish phase has been hit or the premier crypto will take one more leg to prices below $28,000.
Will there be a sentiment shift?
Promise of more stimulus
The post-US election market sentiment was bullish for President Biden. He promised more stimulus and was seen as a more calm leader with lower geopolitical risk than his predecessor – President Trump. He was also expected to do a better job concerning Covid-19. The major downside risk to his Presidency, at least from the market sentiment perspective, was the imposition of higher tax rates.
With his recent statements and some of his principal officers’, it seems the US economy will get more stimulus. Also, tax rate hike will only come after the virus according to Janet Yellen – Biden’s chosen Head of Treasury. This is positive for the market mood.
Banks not backing down on Quantitative Easing
In January, the banks’ monetary committees have so far maintained optimism in their projections. Fed chair last week said that any monetary or fiscal policy change is not happening anytime soon. The Bank of England, Canada and the European Central Bank also maintained the status quo. All sounding optimistic, expecting massive recovery to follow the end of the pandemic.
Vaccination is speeding up
Vaccination is speeding up much faster than at the start of the year. Over 56.5 million doses of vaccines have been rolled out by different producers and have been distributed to over 50 countries. Although there are more virus reported cases on a daily basis, the global spread rate curve is flattening. Policymakers’ job is becoming easier as the virus is becoming less scary. Confidence is resuming and thus reverberating on the market mood. There are still lockdowns and restrictions especially in the Euro-zone but the market is not much bothered. More attention is on vaccine efficacy, production and distribution.
US Stimlulus & Politics
Going forward, investors will scrutinize Biden’s speech. Not much was talked about during the inauguration. There are some key clues the market will watch out for.
- Will there be more stimulus after the current issues of $1.9 trillion?
- Will Biden play down tax-hike during pandemic?
- What are the possibilities of lockdown?
- What’s the new POTUS’ approach to international politics especially China? The rejoining of the Paris agreement has lightened this a bit but China will be the main focus going forward.
Will the banks keep to their words in spite of inflation?
Global economic affairs change quickly and thus banks are expected to be flexible. The Fed might not hold on until 2023 before making a policy shift. Banks of Canada and Japan are at the lower range of their inflation targets. ECB might take a new shape after Brexit, recovery fund and vaccine roll-out. Therefore, the banks are expected to adjust as events unfold. For the market, rate hike/adjustment is not a non-issue as posited by the banks.
Covid & Vaccines
This could be the most devastating of all, although the market is not looking deep into it right now. Unexpected setbacks especially in vaccine efficacy and distribution will shut down the mood of the market.
Market pricing in optimism – sentiment adjustment
The market’s reception of the recent risk-on development has been less volatile than usual. Could it be that the market has already priced in the majority of the stimulus and recovery aided medium-term forecast? We might start seeing sentiment shift from Covid and stimulus to geopolitics, economic data, banks’ policies and other key market drivers pre-covid.
Short-term risk forecast
Going forward, these are expected to be the underlying risk drivers. The positive sentiments still far outweigh the negative sides. The current risk-off could be as a result of end-of-week profit-taking. The stock markets are expected to maintain the decline while as the dollar bounces across the board to end the week. Also, this sentiment should extend to the early hours of trading next week. However, it won’t take long before the risk-on mood resume. Stock prices are expected to hit fresh highs while the dollar should resume the bearish trend. Oil prices and high beta fx (AUD, NZD & CAD) should resume the long-term bullish trend together with EURUSD and GBPUSD. However, Gold’s current bearish run is expected to extend to 1840 at least although a return below 1800 is very much high on the cards.
Overall, a better market mood should support a bullish move for the stock market, oil, commodity fx – AUD, CAD, & NZD and support bearish moves for the safe-havens like the bond market, JPY, USD, CHF. Meanwhile, Gold and Silver in recent months have switched between risk-on to risk-off and we must check their direction of flow regularly.
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