Currency and Stock Markets. Daily Insights

stoch

Active Member
#11
USDJPY and Biden fiscal plans


There was only a brief pause of stocks in terms of bullish headlines from the US government: starting from the last week, we observe development of the store with a new aid package from the Democrats who have finally grasped full power. The size of the expected support is being revised very quickly: last week Goldman estimated the amount of stimulus at $750 billion (of which $ 300 billion will be distributed in the form of stimulus payments), then there were estimates at $1 trillion, $1.3 trillion, and before Biden's today's address to the Americans, the markets are already talking about $2 trillion. Of course, this story roots out any possibility for USD to strengthen and puts pressure on Treasury prices as the market expects a huge portion of the fresh bond supply.


Inflation in the US accelerated in December from 1.3% to 1.4% on an annualized basis, however, as we discussed earlier, the market is not surprised by this acceleration. The acceleration of inflation in the coming months is already reflected in the market inflation premium in bond yields. Comparing the yields of inflation-protected and inflation-unprotected 10-year Treasuries, it is clear that the market expects nothing in terms of interest rates, but expects in terms of inflation:





TIPS yield has changed marginally since October 2020 however 10-year bond yield has more than doubled, from 0.5% to 1.15%.


Weak inflation dynamics would have added weight to the dollar, however, the report played against it.


It was interesting to see the data on the Japanese economy for November and December. As it turned out, the economy was better at weathering through the pandemic crisis in the fourth quarter than previously thought. In general, Japanese assets and the yen look undervalued now, because in general, Japan has grown poorly in the past decade, forcing the Bank of Japan to manipulate rates (not very successfully by the way). Due to the long history of stagnation, investors could be biased about Japanese assets. In terms of data, the key for Japan industrial sector showed good activity in December - industrial orders grew by 1.5% against the forecast of -6.2%. Manufacturing inflation also accelerated - up to 0.5%, ahead of the forecast of 0.2%. If the Biden administration manages to push through the Congress new fiscal stimulus (most likely), one of the main foreign beneficiaries of this event will be Japan, which usually outperforms, but only in the early stages of global reflation. This was the case after the 2008 crisis, when the strengthening reached 80 yen per dollar.


Speaking of USDJPY, from a technical point of view, we are approaching the upper border of medium-term downward channel. Based on the bet that the pair will remain the channel (on the basis of fiscal spending outlook for the US), potential reversal zone could be located in the range 104.50-104.70:






Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#12
What to expect from December US retail sales report?



In his Thursday address president-elect Biden announced $1.9 trillion economic recovery plan, but surprisingly, markets were not particularly excited about this. On the contrary, there was some doldrums. American indices closed in the red on Thursday, and the correctional motive has fed into to other markets today. Losses in European markets at the time of writing remain capped at 1 percent, oil quotes are noticeably lower. The dollar has recouped losses. Anticipated fiscal expansion in the US is pushing gold price up despite broad-based strengthening of greenback on Friday.



Jerome Powell said yesterday that it is premature to discuss when the Fed will begin to taper QE. This statement was expected since the Fed has no choice. If the government starts borrowing on the market again, the Central Bank will have to “collect” new debt on its balance sheet to maintain investors' appetite on the Treasury market. A side effect of this will be an increase in the money supply which is reflected in rising inflation expectations in the US and signs of a bond rout in Treasury market since the beginning on new year.



Powell warned that inflation will start to rise in the second quarter, so if inflation reports show positive aberrations from the forecasts, we still won’t be able to expect a switch to hawkish rhetoric from the Fed.



Claims for unemployment benefits for the previous week showed that the labor market is losing shape rather quickly: the number of initial claims increased from 787 to 965K. This is the highest value since August 2020. The number of continuing claims has also increased - by 141K.







It is no coincidence that Biden said that the repair of economy will start from the labor market - we see that the need for support grows quickly there.



Today the market is expected to be sensitive to the December US retail sales print. Weak NFP prompted investors to expect slowing of consumption in December and hence negative surprise in retail sales. If it turns out that the weakening of the US labor market could not break the consumer potential in the US and the growth of retail sales turns out to be higher than the expected 0%, greenback will likely fall under pressure from revival of risk-on and risky assets will get out of the corrective spiral. The negative deviation of retail sales is likely to be discounted.



Together with the report on retail sales, we expect the report of U. of Michigan to shed light on consumer spending picture in the US. The report will provide estimates of consumer optimism and inflation expectations for December. In November, the consumer confidence index dropped significantly (80.7 points) and is expected to continue to decline in December (80 points). As in the case of retail sales, the negative surprise should have been priced in, but a positive deviation will likely spur demand for risk today, as it will allow revising the effect of the labor market slack in December on the US economy.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.



High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#13
Three reasons for uneven equity markets growth in 2021


Stock indices of advanced economies rose on Wednesday, large ETFs investing in emerging markets saw moderate inflows on Tuesday. The speech of Janet Yellen who assumes the office of the US Treasury secretary affirmed that not only a short-sighted approach will continue in the US fiscal policy, but it may become even more pronounced. Yellen’s remark about the need to “act big” ignoring growing public debt issues was basically a signal that she, as a head of the Treasury, favors further debt accumulation as a remedy for short-term economic issues. It is clear that the US administration will float new measures to support the economy and the goal is to determine who will benefit from the spending spree.

The SPX has gained 13% since the US presidential election and during this leg of the bull market investors priced in both an early end pandemic, thanks to vaccine rollout, and economic rebound in 2021. However, as we enter in the actual phase of recovery market growth will be likely less uniform and investors will become pickier.

There are three reasons for that. First, there is a consensus taking shape that growth stocks are overbought: the gap in forward P/E for growth and value sharply widened in 2020 to the highest level in two decades, indicating that investors have accumulated the highest bias in stock preferences since the dotcom bubble:



Second, value stocks, which good part is cyclical stocks, are expected to thrive in the coming phase of higher economic growth with premium in their prices gradually dwindling. After unveiling the spending plan from the new administration, Goldman Sachs added 2 pp to the expected US GDP growth and forecasts it at 6.6% in 2021. NY Fed forecast currently implies GDP growth at 6.2% in 2021, with signs of acceleration since December 2020:



Markets probably haven’t priced in this momentum yet.

Third, policy moves from the new US administration should benefit the sectors that will drive economic growth and consumption in the future. This also implies more selective investor approach and a focus on firms and sectors that the government will favor. Biden’s plan for innovations includes increased investments in healthcare and green energy, including a move to electric vehicles, which should secure orders for companies such as GM, Ford and Tesla.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#14
Reflation bet in the US appears to be gaining traction

US futures and European stocks resumed rally anticipating more bullish updates from the new US administration. We saw fresh highs in S&P 500 yesterday and extension of bullish sentiment in today’s session with SPX futures hitting new peak at ~ 3860 point. Recall that we discussed possible reasons of market participants to increase their exposure in US stocks. Breaking down returns of US equity markets by indexes and taking the start of 2021 as the starting point, we see strong evidence that investors are increasing their bets on reflation (economic rebound) in the US economy:





The small caps that make up the Rusell 2000 Index posted a combined 9% return in 21 days, while returns of its peers are much lower - 2-4%. It’s well-known empirical observation that small-caps benefit from early stages of pickup phase of a business cycle and recent market developments clearly reflect the efforts of investors to price such expectations. We also see that tech sector has caught up its peers in recent days, most likely because rhetoric of the new administration is dominated by talk about stimulus and, to a lesser extent, about taxes, regulation and scary things for Nasdaq firms. This helped investors in the index to breathe out. Democrats’ discussion about income redistribution, taxes on rich and corporations should nevertheless begin later when risks for the economy subside.

Consumer prices in the UK came out higher than expected in December, what increased Pound’s appeal in the FX space. GBPUSD saw a brief bout of resistance at 1.37 and from the technical standpoints aims to break through the range with targets at new multi-year highs:





The UK economy, or rather the consumer component, judging by inflation in December, showed pretty strong resistance to a lockdown, which is a surprise for expectations.

The Bank of Japan was unable to salvage long positions in USDJPY, although it said it was too early to abandon its policy of low rates and yield curve control. The dovish stance of the Bank of Japan is factored in yen’s exchange rate and attention of investors is focused on another important factor - fiscal stimulus in the United States. Earlier, we discussed why a fiscal impulse in the US could have a positive effect on Japanese assets, and therefore increase the attractiveness of the Japanese currency.

After weak consumer inflation print in Canada as shown in the report released on Wednesday, the Bank of Canada was expected to express concerns, but it turned out exactly the opposite, which caused USDCAD to move down from 1.2990 to 1.2920. Due to the unusual stance of the Central Bank, the movement along the dovish trend in USDCAD will probably remain in force. As a macro factor, persistent upside pressure in the oil market helps CAD to stay strong. Judging by shifts in exposure in the US stock market (clear overweight in cyclical small-caps), we may also see a preparation for a breakout through local highs in the oil market. But let’s not forget that we have US shale sector which is still alive (despite Biden agenda which is long-term negative for US oil) and the US inventories, according to the latest API update rose for the first time in weeks which is definitely a worrying development for OPEC and oil market participants.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#15
China – new center of gravity for investors?


Asian equity markets climbed to the levels close to all-time highs on Monday amid expectations that growth in Asian economies will continue to outpace recovery of Western peers. Interestingly enough, the rally in Asian equity markets have notably accelerated compared to US stocks since the start of November 2020:




Comparison of returns of US and Asian stocks via performance of two large ETFs


Optimism in the Asian market was also fueled by the UN report which showed that China surpassed the United States in 2020 in terms of foreign direct investments (FDI). The rationale behind this is that the United States was doing worse and longer in coping with the sanitary crisis, and would therefore underperform compared to China in terms of the pace of post-crisis recovery. Investments in the United States fell 49% year-on-year, while in China they not only escaped a drop, but also grew by 4%, despite a general collapse of direct investment by 42%.

For East Asia as a whole (China, Japan, Korea, Taiwan) FDI decreased by 4% in 2020, while in developed economies - by 69%.

China's recovery in the fourth quarter accelerated and GDP growth exceeded expectations. The Chinese economy ended 2020 in extremely good shape and despite the continuation of the pandemic is likely to accelerate this year.

Foreign direct investment is an indicator of investor expectations regarding the rate of return that can be expected in an economy over a 5-10 years horizon of investment.

The UN report also supported commodity currencies - AUD and NZD, which through the trading channel are sensitive to changes in Asian economic outlook. They gained 0.3 and 0.5% against the US dollar. In general, trading in the foreign exchange markets occurs today without pronounced trends, since markets are waiting for more information on the stance of the Fed, which will hold a meeting on Wednesday. Investors' focus is on the way how the US central bank will comment on the government plans to once again seek help from the debt market (to fund the next stimulus package). By the way, despite the absence of announcements of monetary easing, Fed’s balance sheet continues to expand and renew all-time highs:





which supports the stock market and keeps the trend towards compression of credit spreads (markets’ “fear” gauge):



In such situation, it is difficult to imagine what could cause a reversal in risk assets in the near future, where, among the positive catalysts, a new fiscal stimulus in the United States is expected by almost $2 trillion.

The dollar index has every chance of diving below 90 points today, if the vote in Congress on the appointment of Janet Yellen to the post of the head of the Treasury shows strong support from the Republicans. The fact is that in her last speech, Yellen basically said that “while there is an opportunity to borrow (due to low interest rates), we need to borrow”. Therefore, the level of support of Yellen from Republicans will actually reveal the number of headwinds the new stimulus package will meet in the Congress during the voting.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#16
What does seasonality tell us about equity markets growth in February?


US consumer confidence ticked higher in January, but details of the Conference Board report showed persistent concerns of households about job opportunities. This suggests weak labor market dynamics could extend into January, following negative NFP surprise in December.

Nonetheless, the Conference Board survey showed that US households remain optimistic and are planning to buy real estate and cars within the next 6 months. The US economy is driven by consumption and the data gives hope that the forecasts for economic expansion in the first quarter will justify elevated equity valuations.

In addition to the feeling of overbought in the market, the bullish trend is at risk due to news background turning less rosy. This is a shift in expectations regarding the US stimulus package (towards a smaller size, ~ $ 1 tn., against the expected $2 tn.), and numerous reports that vaccine manufacturers are delaying supplies, which slows down vaccinations, delaying the start of easing of lockdowns. It is worth to pay attention to seasonality factor, which tells us that equity market grows weakly in February, and on average experiences a correction:





The US consumer sentiment index rose from 87.1 to 89.3 in January. It cannot be ruled out that the main merit came from the $900 billion in aid to the economy which the government approved in December, helping economy to avert a hit to propensity to consumption.

In terms of the report's connection to the labor market, a highly correlated with unemployment rate indicator called labor market differential declined from -1.9 points in December to -3.2 points in January. The correlation with unemployment rate looks really tight:



This useful indicator is calculated on the basis of the attitude of those respondents who believe that there are enough vacancies in the labor market to those who believe that it is difficult to find a job. The decline in the index increases the chances that we will see a negative surprise in Payrolls in February, as happened with the January report. That can be a catalyst for equity market correction.

Worsening expectations for the European economy in line with the latest data on the state of the business climate in Germany, indices of activity in the manufacturing sector and consumer optimism in Germany and France, worsened outlook for European assets. European stocks remain on the defensive, with the Euro down 0.25% against the dollar and about the same against the pound. German GFk Consumer Confidence Index fell from -7.5 to -15.6, indicating an increase in deflation risks. French consumers were also disappointed by the outlook for personal incomes with the index falling short of market expectations in January.

Oil prices were supported by API data, as well as Chinese statistics on new cases of Covid-19, which showed a further decline, thus reducing the risk of new lockdowns. If the EIA data confirms the API estimate for reserves, the price of WTI is likely to try to test $53 today, in part thanks to momentum from Tuesday.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#17
Why stock markets can fall further, but not for long


The US dollar extends bullish correction entirely on the back of increased volatility in the stock markets. The risk-off on Friday were fueled by an apparent liquidity shortage in China money markets, where the overnight repo rate rose to a 5-year high, presumably also signaling increased credit risk.

The halt of trading in shares that were rampantly bought up by retail investors in recent days calmed markets on Thursday, but today it became known that brokers resumed access to buying, so the hot theme of market cornering and short squeeze of hedge funds has every chance of jolting stock markets again. To justify this, take a look at the following chart:





It shows the value of two portfolios - stocks which have the highest number of short interest (aka “most shorted stocks”) and stocks - favorites of hedge funds. The indices are completely different in terms of composition of portfolios - the first consists of “losers” according to some market consensus (since they were heavily shorted), while the second – good firms with strong potential. It can be seen that in the last few days, especially on January 26-28, the indices mirror each other - when the value of “most shorted” index rises, the VIP index falls. That is, when retail investors rushed to buy shares of hopeless firms, for some reason market favorites fell. How can it be possible? One of the most logical explanations is that hedge funds were forced to sell their favorites from the index below in order to cover their short positions in stocks from the index above.

From the reasoning above, it follows that if hedge funds failed to reposition and close shorts yesterday when trading were halted, resumption of the opportunity to buy losers could allow the army of retail investors to again push the pros to the wall and this could lead to deeper fall in ‘favorite’ stocks, which, as we have already seen, easily feeds into the broader market, which is quite fragile due to weak news background and proximity to historical highs.

However, it is worth remembering that the macro picture has not changed much. Investors continue expect economic rebound in the first half of 2021. The risk described in the article is unique, so long-term correction, in my opinion, can be safely ruled-out. I consider the 3650 level in the S&P 500 (Christmas lows) as a potential entry point upwards. Unless, of course, the market turns around earlier.


Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#18
Market short-squeeze is likely to continue keeping broad market under pressure


Asian and European stock indices rose on Monday, while silver surged nearly 10% (5-month high) as investors on social media and chatrooms have apparently set their choice on the precious metal for another pump. The rest of the precious metals complex posted much more modest gains.

The global stock index MSCI All-Country World lost 3.6% last week, but recovered 0.5% on Monday. However, it is still too early to take the rebound as a signal of reversal: inspired by recent success in GME and AMC, retail investors will likely continue raids on outsider shares, devastating short sellers. Goldman Sachs said that ongoing short squeeze was the biggest in 25 years with most shorted stocks almost doubled in just 3 months. Top-50 stocks in Russel 2000 (index small-cap firms) by volume of short positions in open interest rose by almost 60%:



These market trends suggest that the companies combing high volume of short positions in open interest with small market cap, increasingly become the targets for a pump driven by amateur investors, forcing market participants which weren’t lucky enough to be on the short side to seriously worry. According to the latest data, hedge fund Melvin Capital, the most famous victim of recent short squeeze, lost about $ 7 billion last week. In January, the fund's assets fell by more than half. Another financial institution, Maplelane Capital, was reported by the WSJ to suffer a 45% loss in January (it managed $ 3.5 billion).

According to GS, attacks on the short sellers prompted hedge funds to carry out massive deleveraging last week, pushing equities lower across the globe. However, given that the short-squeeze strategy hasn’t experienced massive failure so far, it’s likely to continue maintain the risk of further downside in the markets.

It should be well understood that the losses of hedge funds and associated liquidation of positions in stocks market favorites (which pulls broad indices down), is only one mechanism of development of correction. The second channel of impact is the wave of withdrawal of shabby deposits from funds, which is apparently gaining momentum. To meet withdrawal requests, hedge funds will be forced to sell assets increasing pressure on the broad market.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#19
S&P 500 poised to break 3900 on NFP release as the US recovery gains steam

The December Non-Farm Payrolls report made investors seriously worried about impact of the coronavirus restrictions imposed in the winter on the US economy. Then the number of jobs in the economy shrank by 140 thousand, in particular due to the fact that 372 thousand restaurant workers lost their jobs. That quickly changed, though, with economic data for January pointing to expansion on all fronts. What kind of data made it possible to revise so quickly the outlook for the US economy in the first quarter and what impact on stocks we should expect?

First, these are indicators of activity and employment in the services sector, which accounts for about 70% of US GDP. The sector was hit hard in November and December due to tightening of social distancing measures and forced business closures. This week, the data such as the ISM Service Sector Activity Index, ADP January report, came out well above expectations. In particular, the ISM employment sub-index rose from a depressed 48.7 points to 55.2 points, indicating quite fast recovery in the pace of hiring. The ISM report on manufacturing sector released earlier this week also pointed to rebound in labor demand - the corresponding sub-index ticked higher, from 51.7 to 52.6 points. The 50-point mark in PMI indices separates zones of depression and recovery.

The ADP estimate of job growth nearly tripled expectations of 174,000 versus 49,000 forecast, although investors expected a rather downside surprise.

The latest readings in unemployment claims data, which experienced a brief surge in December, indicated that situation stabilizes with layoffs slowing quickly:



The growth of initial unemployment claims has been slowing for three weeks in a row while continuing claims also consistently beat expectations, dropping below 5 mn.

Following the data updates, Goldman updated its forecast for NFP jobs count, increasing its estimate from 125 to 200 thousand, which is higher than market consensus (50 thousand).

Second, in early January, stimulus checks from the government, which Congress approved in December, started to prop-up consumption. This led to high-frequency US consumption data indicating a spike in consumer spending in January:


High-frequency indicators indicate that in January, US consumption not only recovered, but could exceed pre-crisis levels by 4.1%. It’s extremely welcomed data as rising spending translates into rising firm revenues and consequent higher demand for labor.

The US dollar tends to appreciate either during downturns which are accompanied by tightening financial conditions => lack of liquidity (which drives demand for financing currencies, i.e. USD), or when there are expectations that US economy will outperform the Old World like EU or UK. The latest data on the US economy speaks in favor of the second scenario.

As we discussed in the article about possible new all-time highs in SPX, rapidly improving outlook for the US economy is accompanied by capital inflows in risk assets nominated in the US Dollar, and emerging economies, primarily in stock markets. The SPX hit its all-time high yesterday closing at 3875 points. In my opinion, a positive deviation in today's NFP report will be a catalyst for SPX breakout of 3900 mark. Preliminary data allow us to count on this outcome in the data.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

stoch

Active Member
#20
Democrats inch closer to the huge stimulus bill. Should we expect inflation shock?

Both houses of the US Congress approved on Friday a budget plan that effectively deprived Republicans of any possibility of obstructing a new coronavirus relief package. Now, to approve the $1.9 trillion aid, a simple majority (51 votes), instead of the usual 60, will be enough for the Democrats.

Democrats and Republicans shared equally seats in the Senate, but Vice President Kamala Harris has the tie-breaking vote. As a representative of the Democratic Party, she will likely tip the scales in favor of Democrats in the voting on any tough Senate motion.

The news sparked a violent reaction in the markets fueling the rally towards new all-time highs. In line with the ideas we discussed last week, the S&P 500 is preparing to occupy a foothold at 3900.

As the markets celebrate another victory, various economists, even determined Keynesians, are sounding the alarm. The biggest risk is that another boom in government spending could push economy into overdrive, which, on the contrary, will be harmful, primarily by causing a jump in inflation. Already, the commodity price index, closely followed by the US consumer inflation, has jumped 25% over the year, which, given the correlation in historical data, corresponds to consumer inflation of about 4% in the United States:





Of course, in the immediate aftermath of the past recessions, consumer inflation has not kept pace with commodity prices, but the post-2020 recovery has been much faster than in past crises, and the US government intends to directly stimulate consumer spending, which will remove the main barrier to cost-push inflation.

Nevertheless, the head of the Treasury Janet Yellen made it clear that she sees more pain for the economy due to delay and less than necessary stimulus. In an interview over the weekend, she said the central bank has all the tools it needs to keep inflation under control. In her opinion, if the government approves the announced stimulus, the economy will recoup lost jobs by the end of 2022.

Expectations of stimulus measures fuel risk appetite in the markets. As the past stimulus rounds have shown, the consumer in the United States did not have time to worry and turn on austerity mode – government money transfers (“stimmy checks”) was followed by surges in consumer spending, which, as a result, led to an increase in companies' revenues. Consider the 44% growth in Amazon sales in 2020, despite the consensus that pandemic caused the worst shock in consumption since the Great Depression in the US. Tax risks have not materialized, as the hawkish Democrats have made it clear that they will return to this issue when the economy is on its feet.



Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
 

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