By Hussein Sayed, Chief Market Strategist at FXTM
Stocks hit an all-time high early Thursday on optimism that the new US administration will take bold steps in reviving growth and speed up vaccine distribution.
All three major US indices climbed to new records on President Biden’s swearing in, with the S&P 500 posting its best Inauguration Day gains since President Reagan’s second term in 1985.
While markets are optimistic that a massive US economic relief will be approved by the Senate sometime soon, it wasn’t the only reason helping risk assets. Despite many warnings of armed protests at state capitols across the country, the lack of violence on Wednesday helped revive risk appetite.
With this additional equity risk premium diminished, we are likely to see stock markets achieve more new highs in the weeks to come.
The Greenback fell against most high beta currencies on Wednesday and has continued its slide on Thursday. Commodity currencies benefited the most from the better risk sentiment, with the Canadian Dollar outperforming after the Bank of Canada kept policy unchanged, defying expectations of a micro rate cut.
The Australian Dollar also approached its yearly highs following better than expected employment data released overnight.
Euro falling behind
Meanwhile, the Euro failed to catch up with the trend due to expectations of more economic pain as the new variant of coronavirus will likely lead to extended and additional lockdowns. Investor’s and trader’s focus will shift to the ECB meeting later Thursday.
Short term risks are mounting in the Eurozone given the extended lockdowns in the region and the Italian political mess. Chances of another contraction in GDP this quarter are higher than when the central bank last met in December.
However, the longer-term outlook is brighter as European countries are stepping up vaccine purchases and increasing production. With more vaccines hitting the market in 2021 there is optimism that a strong recovery will take hold in the second half of the year.
Trying to find a balance between short term risks and longer-term optimism is kind of tricky and there’s little monetary policy can do to revive economic growth. The biggest concern is likely to be the stronger Euro which could keep headline inflation suppressed.
Overall, we do not expect any changes on the policy front and the big test is likely to be Christine Lagarde’s communication to the market, and what messages she will send to curb further strength in the single currency.
In commodity markets, oil gave up some of Wednesday’s gains after the American Petroleum Institute data showed inventories increased 2.6 million barrels last week, versus expectations of a 1.2 million drop. A one-time increase in data should not have a substantial effect on prices, but if it persists over the next couple of weeks, that could be a warning signal that triggers profit-taking.
So far, it’s the supply side of the equation that’s moving prices; however, if demand falls further, problems may arise for OPEC+ who are doing their best to keep the equation balanced.
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