Can US fiscal relief hopes continue boosting markets? What will happen if relief and vaccine hopes do not materialize? Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the next moves in markets as Joe Biden enters the White House.
Yohay Elam: Markets seemed to cheer Biden's presidency and most importantly, his ambitious $1.9 trillion proposals. How much of that is priced in? Will investors be disappointed if the actual result is smaller?
Valeria Bednarik: Would say that investors have not yet priced it fully in. He won't pass it easily regardless of Democrats pretty much-controlling Houses. At the same time, investors tend to be optimistic, but I would say that further pricing will be once the picture is clearer. Let's hope for the best.
Joseph Trevisani: Equity markets have been rising for many months that is pricing for the recovery. The stimulus is more to correct the current slowdown.
Yohay Elam: Indeed, markets want to see more money, and the sooner the better. If Biden hits bumps on the road, will the dollar benefit from safe-haven flows?. Or will falling yields weigh on the dollar?
Valeria Bednarik: Umm to early to say. he has been in the office for 3 days and the sentiment continues to gyrate around coronavirus contagions/vaccines. I would expect the market to give some time for the promised stimulus package to unfold.
Yohay Elam: Investors do not tend to have patience, but they'll need some. Speaking about patience and the vaccine. Biden promised 100 million doses in 100 days. Critics say that not ambitious enough.
Joseph Trevisani: I believe that has been the government plan for some time but I think markets are more keyed on the actual pandemic numbers.
Valeria Bednarik: That is a much relevant risk factor. Yet as you said, if he fails to deliver, the dollar may gain on safe-haven demand. It will depend on the situation in Europe. Uneven progress in immunization could make a difference.
Yohay Elam: I think Biden is trying to under-promise and then over-deliver. A change from the past. In Europe, I am not sure what politicians promised, but they are under-delivering for sure
Valeria Bednarik: That would be great for the US indeed. But, and there's always a "but," the focus may return to the trade war? Biden is nowhere closer to end it than Trump was.
Yohay Elam: The trade war is so 2019! But probably making a comeback in 2021.
Valeria Bednarik: In fact, Yellen promised to use a “full array of tools,” to curb China’s abusive practices. Yups, comeback underway! you didn't mention 2020.
Yohay Elam: The first rule of 2020, don't talk about 2020... A trade war should benefit the safe-haven dollar, and also the yen. While vaccines could weigh on the safe-haven dollar.
Valeria Bednarik: The yen is too strong for Japan's sake... intervention may come, although not that it actually works. Still, it would be another interesting factor to spice markets.
Yohay Elam: Japanese intervention is so 2011.
Valeria Bednarik: I'm still convinced but do not share, that market participants expect an economic comeback by the second half of this year. Yet, as long as the market believes so, well, we will have rallying high-yielders. Wall Street reached record highs within Biden's inauguration.
Joseph Trevisani: Equity markets have been anticipating a recovery for months and have scored repeated new highs both before and after the US election. It is the natural assumption. If it does not arrive or the vaccine fails to curb the virus is will be a tremendous shock, one that will deliver the US dollar back to safe-haven status.
Yohay Elam: I am optimistic as long as vaccines beat the virus variants. Governments and central banks are pouring money.
Valeria Bednarik: I don't even want to go there.
Yohay Elam: That used to result in inflation.
Valeria Bednarik: Yeah, governments and central banks will continue to pour money for sure
Yohay Elam: Central banks were fighting inflation for years, then fought inflation ghosts, and have now decided inflation is dead.
Joseph Trevisani: Bank rhetoric continues to cite inflation but actions are solely tied to economic growth.
Valeria Bednarik: But, no, I don't think we are going to see rising inflation. Consumption is depressed, multiple businesses have closed, the reconstruction will be long and so the path to higher inflation.
Yohay Elam: I agree. The longer the crisis lasts, the more it turns into a normal recession rather than a temporary freeze of the economy, it is not only waiters, cruise ships, etc. conference workers. The economic crisis is gradually hitting other industries and occupations.
Joseph Trevisani: I agree also.The great monetary policy lesson from the financial crisis is that without demand no amount of liquidity produces inflation.
Valeria Bednarik: Yups, exactly. As you said, it's getting closer to be a normal, global recession. Even if the vaccine works and we get rid of the pandemic this year.
Yohay Elam: I think we will see clear results that the vaccine works in Israel in the first half of February. Prompting pressure on governments to ramp up production and distribution. But if I'm wrong, is the dollar the ultimate safe-haven in 2021?. Will the yen make a comeback? Is gold a safe-haven?
Valeria Bednarik: Gold first, the dollar second.
Yohay Elam: Interesting, why?
Valeria Bednarik: I can see gold returning to 2,000 in a risk-averse scenario, mostly because things are far from good in the US. Yeah, impressive GDP figures (we are getting an update next week) but also millions of jobs lost with the recovery slowing month after month. Or maybe just because I'm old fashioned and I prefer gold he!
Yohay Elam: Haha. I think the best case for gold is more stimulus. That Biden succeeds in passing most of his plan. That yields will rise. And that the Fed will ramp up bond buying to scoop up the new debt. That's gold bullish.
Valeria Bednarik: Yups, agree. In fact, I don't see much-supporting gold's bearish case, despite its latest slide.
Joseph Trevisani: The dollar is the ultimate financial safe-haven, there is nowhere else to place large amounts of investment. But gold is the ultimate emotional safety play. To some degree they are separate motivations.
Yohay Elam: For me, the bearish case is that Biden succeeds, yields go up, and the Fed says that that's OK because higher yields reflect a correct assessment of a brighter future. In that case, higher yields are gold bearish. But in that scenario, stocks fall because of higher yields. And Powell will not let that happen.
Valeria Bednarik: Also agree with that picture. Guess nobody wants to see stocks down at this time.
Yohay Elam: The buzzwords are financial conditions – they must be maintained, aka stocks should rise. Conversely, if Powell talks about froth, it may be a sell signal. Perhaps I'm making too much of Powell's power. The Fed is also slated for next week. Any thoughts?
Valeria Bednarik: I think you will be disappointed. He may have power, but he won't use it. Back to Powell. I mean he can do more, but I don't think he would like to. Moreover, now that we are waiting for a fresh stimulus package.
Joseph Trevisani: The Fed remembers the taper tantrum. Powell will avoid a repetition. If the economy does improve Treasury rates will rise with the Fed acting as a speed brake. With the stimulus and economic improvement still pending, the Fed will wait.
Yohay Elam: He'll probably wait to see what Congress does. And have more patience than markets.
Valeria Bednarik: Agreed. Bottom line, we need to wait to see a substantial dollar comeback? Either because of self-strength or panic?
Yohay Elam: Some kind of mean-reversion especially against the euro, especially amid Europe's vaccine sluggishness.
Joseph Trevisani: I think markets are waiting for a change in scenario, for currencies that is likely to be a stronger dollar.
Valeria Bednarik: Yeah. On a positive note, remember when the pandemic started and the world was short of masks and respirators? Guess the same is going on now with vaccines. We are short of them, but it won't take that long for more vaccines to come to the market. I'm optimistic about that, but well, I also think the economic comeback won't happen at least until next year.
Joseph Trevisani: Everyone anticipates a different spring and summer but so far, there is little confirmation. You can witness the anticipation in the lack of real movement in the majors, expiring trends all. Look at the US housing market, very strong construction numbers in the winter, usually the slowest months of the year. That would seem to indicate a boom ahead. For currencies I think the question centers on the dollar. Will a revived US economy, from the stimulus, low rates, or natural expansion, reverse the course of the greenback? I think it will but again, the proof is lacking.
Valeria Bednarik: Some numbers are encouraging indeed, but some are not. My main concern is the slowing pace of job creation in the US. As long as things keep worsening on that front, I have to bet just a few chips on a US economic comeback.
Yohay Elam: Indeed, there´s a booming housing market in many places, which is a bullish sign. And I totally agree about vaccines. Currently, there are manufacturing, distribution, and trust problems. By the autumn, we will be able to vaccinate our pets.
Joseph Trevisani: One negative note. The Israeli caseload has yet to decline even though they have the highest vaccination rate in the world. On that, we shall see next week.
Yohay Elam: Any improvement in Israel next week can still be at least partially attributed to the lockdown. By mid-February, we should have convincing evidence. Studies show that the vaccine lowers infection, not only disease. But there's a difference between advanced statistics show and improvement the public can see – fewer measures without hospitals filling up.
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