Looking into the Pensieve: What can 2021 hold?
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UNLOCK OFFERMarkets are keyed for an end to the pandemic. Equities are acting as if it is already over. In the US there is a new administration, in the UK a new border and everywhere the electronic world has become the dominant force in commercial and social life. What do these incredibly rapid changes hold for the markets? Join FXStreet senior analysts, Valeria Bednarik, Yohay Elam, and Joseph Trevisani for a look ahead.
Valeria Bednarik: What's actually moving markets these days? Is it possible that a bunch of legos are ruling financial markets? Are we so desperate in need of a new catalyst away from covid that we are responding to this?
Joseph Trevisani: Yes, it seems like it, but then, that is exactly what hedge funds have done for years.
Valeria Bednarik: They are jealous...
Joseph Trevisani: Well, on that topic case, rates and hospitalizations are dropping in the US, long before vaccination has moved. Yes. Short sellers can destroy companies, so they are hardly sympathetic. But the rise in GS is not rational either.
Valeria Bednarik: We have to agree that markets are hardly "rational."
Joseph Trevisani: Over the long run they are but equities have been boosted for a decade by Fed intervention.
Valeria Bednarik: US data keeps coming out soft, to say the least. Powell yesterday somehow indicated that growth and employment creation slowed in the recent months. Yey stocks keep moving higher. We use to say that happened because of hopes, but seems it's not the only driver. As you said, the pandemic situation seems to be improving even with vaccine delivery delayed. Yes, agreed on that. And what about other central banks? Both the ECB and the BOJ have said they are "vigilant" on the exchange rate and hinted at measures to counter USD weakness.
Joseph Trevisani: So their economic rationality has been determined by comparisons to other investments, not economics. When I hear central bank intervention I get nostalgic for my trading days. CB intervention rarely works, and never for very long. So I don't see much effort from them at these rates.
Valeria Bednarik: Have to agree on that also. The announcement has more effect on prices, and a temporal one, than the actual action.
Joseph Trevisani: I think there is a good economic case to be made for a strong year when and if the pandemic relents. Yes, I don't see Ms. Lagarde or Mr. Kuroda successfully manipulating their currencies. More importantly, the dollar will rise when and if the US economy gets going.
Valeria Bednarik: Well, not that they have much more room. Whatever they say about FX rates, the truth is that the focus remains on keeping afloat economic throughout the pandemic. And well will it be? Will the US economy get going before others? Guess the country will approach herd immunity earlier than others.
Joseph Trevisani: History says it will, the US is usually a more flexible economy in addition there is potential growth from the adjustments made necessary by homework.
Valeria Bednarik: 26 million reported cases, with asymptomatics and a conservative estimate, can we multiply that by 4 and consider over 100 million Americans have been through coronavirus? 1/3 of the population.
Joseph Trevisani: Yes and again the hospital system was not close to being overwhelmed.
Valeria Bednarik: That will also add to the sooner economic recovery.
Joseph Trevisani: It is very hard to separate the emotions from the reality on this topic, particularly here in the US where it is a political football.
Valeria Bednarik: Is not exclusive to the US...
Joseph Trevisani: I think Jerome Powell said it best... The best engine for growth is an end to the pandemic. Yes, I suppose it is not, politics being what it is.
Valeria Bednarik: Yups, guess everyone figured out late that putting the world on pause until the "end to the pandemic," was not the best idea.
Joseph Trevisani: It does seem that the lockdowns achieved little except to devastate economies.
Valeria Bednarik: Exactly. yet no lockdown was devastating in terms of deaths. it's quite a hard choice.
Joseph Trevisani: On the other hand, they accelerated change, which will produce economic growth, the possibilities for a new economy have been made manifest.
Valeria Bednarik: Yes. The light at the end of the tunnel. Do you think it's still achievable in the second half of this year? Is then when we could expect the dollar to rally?
Joseph Trevisani: I can see the Reddit stock play as a product of the forced isolation, after all, Reddit has existed for a decade.
Valeria Bednarik: That's for sure.
Joseph Trevisani: I do, and I expect a dollar rally sooner.
Valeria Bednarik: How sooner? I mean, I can't see it falling much more at this time, but I can't see it surging yet. My take is that we are going to see some choppy consolidation for at least a month or so. Beyond the Reddit thingy, markets are still in need of a clear catalyst.
Joseph Trevisani: Yes, price action tells me the dollar is waiting for a catalyst I agree. If the 10-year Treasury reached 1.5% that might do it, even before but I am not sure the Fed will permit that. A return to labor market growth in the US might succeed also.
Valeria Bednarik: Poor Treasury yields.. that 1.5% in the 10-year note seems far, far away.. like in fairy tales.
Joseph Trevisani: Well I am a believer in the imagination. If the Fed were not involved the 10-year would be much higher, but the bankers dare not remove their repression. The end game for all this rate repression unknown.
Valeria Bednarik: Well, we need some uncertainty to keep our adrenaline alive.
Joseph Trevisani: Well, we certainly have that. There are two main incentives for a higher dollar. First, the markets need a new scenario, selling the dollar is exhausted. Second, the US economy usually does perform better than Europe or Japan. The Dow is now up 560.
Valeria Bednarik: Yups, trimming almost all yesterday's losses.
Joseph Trevisani: For equities, there is no rational economic level. If the US data begins to improve stocks will continue higher.
Valeria Bednarik: Yeah, record highs are no barrier there anyway, I guess the most affected will be GBP/USD. The Pound is quite resilient these days, having left Brexit behind and despite the current health crisis. Guess GBP/USD buyers will soon suffer a reality check.
Joseph Trevisani: The UK government seems to be a good deal more discombobulated by the pandemic than the US. Perhaps that is because it is responsible for the health system as well. I think the sterling has potential, certainly by historic standards it is relatively low. Here also I think Brexit will generate growth.
Yohay Elam: The UK has been surging forward with its vaccination campaign. I think that it is one of the recent upside drivers.
Valeria Bednarik: That, I'm not sure. I mean, the EU will make the UK pay a high price for disrupting the Union.
Yohay Elam: Later in the year, others will catch up, and the UK will stay with Brexit, which is already causing issues via non-tariff barriers. I am unable to buy my favorite British-made energy bars due to Brexit. Paperwork is killing their exports. That's anecdotal evidence, but I believe hard data will follow. Moreover, both sides left services and financial services to future negotiations. The UK has more to lose on that front.
Valeria Bednarik: I'm with Yohay. That's why I think the GBPUSD has more to lose on a strong dollar scenario.
Joseph Trevisani: Truly the sides predicting positive or negative results from Brexit are approaching results. Aside from the spin that will be inevitable, I think it will take a year at least to get a real picture.
Valeria Bednarik: Yups, not something that we solved anytime soon. But for now, the market believes it's over.
Yohay Elam: Covid is bigger than Brexit, and the UK has a relative advantage over Europe, at least for now.
Valeria Bednarik: Think so? guess the UK may be closer to heard immunity due to massive contagions and vaccines... better than Europe no doubt.
Joseph Trevisani: It seems that National Health is having a more difficult time with its caseload than the more diverse US system. Yes, and more to go. I put up my GDP piece just before we started. But it is hard to tell from reading the news, even when you think you can trust it.
Valeria Bednarik: We live in a world with too much information. And as you said, the isolation exacerbated it.
Joseph Trevisani: Yes, too much life is migrating to the electronic world. Are you both familiar with the Matrix movies?
Yohay Elam: Everybody is familiar with the Matrix...
Joseph Trevisani: Ah, I'm never sure.
Yohay Elam: Hopefully we will soon see a parallel world in Israel, where vaccinations have their full effect and life will go to normal thanks to vaccines, a world first.
Valeria Bednarik: Yeah.
Yohay Elam: That would provide hope for the rest of the world.
Valeria Bednarik: Can you adopt me Yohay?
Yohay Elam: I believe that in mid-February we will see significant results.
Joseph Trevisani: Yes, though as I mentioned earlier US cases and hospitalizations are falling.
Yohay Elam: I can't get the vaccine at the moment – not a resident...
Joseph Trevisani: Me either.
Valeria Bednarik: Russia promised 5 million doses in January. We got just 800K. I'm pretty sure you will get there much faster than I.
Yohay Elam: This was expected: issues with production, distribution, and time that the vaccines take to make an impact. It's darkest before dawn.
Joseph Trevisani: Or before you wake up in the Matrix.
Markets are keyed for an end to the pandemic. Equities are acting as if it is already over. In the US there is a new administration, in the UK a new border and everywhere the electronic world has become the dominant force in commercial and social life. What do these incredibly rapid changes hold for the markets? Join FXStreet senior analysts, Valeria Bednarik, Yohay Elam, and Joseph Trevisani for a look ahead.
Valeria Bednarik: What's actually moving markets these days? Is it possible that a bunch of legos are ruling financial markets? Are we so desperate in need of a new catalyst away from covid that we are responding to this?
Joseph Trevisani: Yes, it seems like it, but then, that is exactly what hedge funds have done for years.
Valeria Bednarik: They are jealous...
Joseph Trevisani: Well, on that topic case, rates and hospitalizations are dropping in the US, long before vaccination has moved. Yes. Short sellers can destroy companies, so they are hardly sympathetic. But the rise in GS is not rational either.
Valeria Bednarik: We have to agree that markets are hardly "rational."
Joseph Trevisani: Over the long run they are but equities have been boosted for a decade by Fed intervention.
Valeria Bednarik: US data keeps coming out soft, to say the least. Powell yesterday somehow indicated that growth and employment creation slowed in the recent months. Yey stocks keep moving higher. We use to say that happened because of hopes, but seems it's not the only driver. As you said, the pandemic situation seems to be improving even with vaccine delivery delayed. Yes, agreed on that. And what about other central banks? Both the ECB and the BOJ have said they are "vigilant" on the exchange rate and hinted at measures to counter USD weakness.
Joseph Trevisani: So their economic rationality has been determined by comparisons to other investments, not economics. When I hear central bank intervention I get nostalgic for my trading days. CB intervention rarely works, and never for very long. So I don't see much effort from them at these rates.
Valeria Bednarik: Have to agree on that also. The announcement has more effect on prices, and a temporal one, than the actual action.
Joseph Trevisani: I think there is a good economic case to be made for a strong year when and if the pandemic relents. Yes, I don't see Ms. Lagarde or Mr. Kuroda successfully manipulating their currencies. More importantly, the dollar will rise when and if the US economy gets going.
Valeria Bednarik: Well, not that they have much more room. Whatever they say about FX rates, the truth is that the focus remains on keeping afloat economic throughout the pandemic. And well will it be? Will the US economy get going before others? Guess the country will approach herd immunity earlier than others.
Joseph Trevisani: History says it will, the US is usually a more flexible economy in addition there is potential growth from the adjustments made necessary by homework.
Valeria Bednarik: 26 million reported cases, with asymptomatics and a conservative estimate, can we multiply that by 4 and consider over 100 million Americans have been through coronavirus? 1/3 of the population.
Joseph Trevisani: Yes and again the hospital system was not close to being overwhelmed.
Valeria Bednarik: That will also add to the sooner economic recovery.
Joseph Trevisani: It is very hard to separate the emotions from the reality on this topic, particularly here in the US where it is a political football.
Valeria Bednarik: Is not exclusive to the US...
Joseph Trevisani: I think Jerome Powell said it best... The best engine for growth is an end to the pandemic. Yes, I suppose it is not, politics being what it is.
Valeria Bednarik: Yups, guess everyone figured out late that putting the world on pause until the "end to the pandemic," was not the best idea.
Joseph Trevisani: It does seem that the lockdowns achieved little except to devastate economies.
Valeria Bednarik: Exactly. yet no lockdown was devastating in terms of deaths. it's quite a hard choice.
Joseph Trevisani: On the other hand, they accelerated change, which will produce economic growth, the possibilities for a new economy have been made manifest.
Valeria Bednarik: Yes. The light at the end of the tunnel. Do you think it's still achievable in the second half of this year? Is then when we could expect the dollar to rally?
Joseph Trevisani: I can see the Reddit stock play as a product of the forced isolation, after all, Reddit has existed for a decade.
Valeria Bednarik: That's for sure.
Joseph Trevisani: I do, and I expect a dollar rally sooner.
Valeria Bednarik: How sooner? I mean, I can't see it falling much more at this time, but I can't see it surging yet. My take is that we are going to see some choppy consolidation for at least a month or so. Beyond the Reddit thingy, markets are still in need of a clear catalyst.
Joseph Trevisani: Yes, price action tells me the dollar is waiting for a catalyst I agree. If the 10-year Treasury reached 1.5% that might do it, even before but I am not sure the Fed will permit that. A return to labor market growth in the US might succeed also.
Valeria Bednarik: Poor Treasury yields.. that 1.5% in the 10-year note seems far, far away.. like in fairy tales.
Joseph Trevisani: Well I am a believer in the imagination. If the Fed were not involved the 10-year would be much higher, but the bankers dare not remove their repression. The end game for all this rate repression unknown.
Valeria Bednarik: Well, we need some uncertainty to keep our adrenaline alive.
Joseph Trevisani: Well, we certainly have that. There are two main incentives for a higher dollar. First, the markets need a new scenario, selling the dollar is exhausted. Second, the US economy usually does perform better than Europe or Japan. The Dow is now up 560.
Valeria Bednarik: Yups, trimming almost all yesterday's losses.
Joseph Trevisani: For equities, there is no rational economic level. If the US data begins to improve stocks will continue higher.
Valeria Bednarik: Yeah, record highs are no barrier there anyway, I guess the most affected will be GBP/USD. The Pound is quite resilient these days, having left Brexit behind and despite the current health crisis. Guess GBP/USD buyers will soon suffer a reality check.
Joseph Trevisani: The UK government seems to be a good deal more discombobulated by the pandemic than the US. Perhaps that is because it is responsible for the health system as well. I think the sterling has potential, certainly by historic standards it is relatively low. Here also I think Brexit will generate growth.
Yohay Elam: The UK has been surging forward with its vaccination campaign. I think that it is one of the recent upside drivers.
Valeria Bednarik: That, I'm not sure. I mean, the EU will make the UK pay a high price for disrupting the Union.
Yohay Elam: Later in the year, others will catch up, and the UK will stay with Brexit, which is already causing issues via non-tariff barriers. I am unable to buy my favorite British-made energy bars due to Brexit. Paperwork is killing their exports. That's anecdotal evidence, but I believe hard data will follow. Moreover, both sides left services and financial services to future negotiations. The UK has more to lose on that front.
Valeria Bednarik: I'm with Yohay. That's why I think the GBPUSD has more to lose on a strong dollar scenario.
Joseph Trevisani: Truly the sides predicting positive or negative results from Brexit are approaching results. Aside from the spin that will be inevitable, I think it will take a year at least to get a real picture.
Valeria Bednarik: Yups, not something that we solved anytime soon. But for now, the market believes it's over.
Yohay Elam: Covid is bigger than Brexit, and the UK has a relative advantage over Europe, at least for now.
Valeria Bednarik: Think so? guess the UK may be closer to heard immunity due to massive contagions and vaccines... better than Europe no doubt.
Joseph Trevisani: It seems that National Health is having a more difficult time with its caseload than the more diverse US system. Yes, and more to go. I put up my GDP piece just before we started. But it is hard to tell from reading the news, even when you think you can trust it.
Valeria Bednarik: We live in a world with too much information. And as you said, the isolation exacerbated it.
Joseph Trevisani: Yes, too much life is migrating to the electronic world. Are you both familiar with the Matrix movies?
Yohay Elam: Everybody is familiar with the Matrix...
Joseph Trevisani: Ah, I'm never sure.
Yohay Elam: Hopefully we will soon see a parallel world in Israel, where vaccinations have their full effect and life will go to normal thanks to vaccines, a world first.
Valeria Bednarik: Yeah.
Yohay Elam: That would provide hope for the rest of the world.
Valeria Bednarik: Can you adopt me Yohay?
Yohay Elam: I believe that in mid-February we will see significant results.
Joseph Trevisani: Yes, though as I mentioned earlier US cases and hospitalizations are falling.
Yohay Elam: I can't get the vaccine at the moment – not a resident...
Joseph Trevisani: Me either.
Valeria Bednarik: Russia promised 5 million doses in January. We got just 800K. I'm pretty sure you will get there much faster than I.
Yohay Elam: This was expected: issues with production, distribution, and time that the vaccines take to make an impact. It's darkest before dawn.
Joseph Trevisani: Or before you wake up in the Matrix.
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