Many were saying "good riddance" to 2020 but 2021 has kicked off with a storm. Are markets correctly pricing political risk after the chaos in the Capitol? What does Democratic control of the Senate mean for markets? And for forex traders, there may be tentative signs for a turn in the dollar. Valeria Bednarik, Joseph Trevisani, and Yohay Elam discuss the latest developments and look toward the next moves.
Yohay Elam: A mob temporarily took over the US Capitol in images reminiscent of coups in third-world countries. Markets retreated from their highs but seem calm. What are investors focusing on and what are they shrugging off?.
Valeria Bednarik: As usual, markets are more focused on what's to come than on what's going on right now. Democrats took over the government after Georgia's runoff. President Biden's agenda may have an easy path ahead. Also, and despite the bumpy start of vaccination, speculative interest is still betting on an economic comeback in the second half of this year.
Joseph Trevisani: Stimulus and recovery. The events in the Capitol were political. They will have no market impact. Markets remain focused, as they should, on the future.
Yohay Elam: Trump still has nearly two more weeks in office. Is there a chance that markets are not pricing another significant political event?. Such as Trump refusing to leave the White House.
Valeria Bednarik: One world comes to my mind. Contention. Republicans are working on containing the damage at this point. He won't refuse to leave the White House. In fact, he yesterday said that it will be an orderly transition on Jan 20.
Joseph Trevisani: The idea of Trump not leaving is absurd, as it has always been. It is a political scare point from the opposition and the media.
Valeria Bednarik: In this one, I totally agree with you.
Joseph Trevisani: Ha. It does happen. The danger to the markets is not Trump at this point but what agenda the Democrats choose. There will be considerable pressure from the more leftist, anti-market elements of the party.
Yohay Elam: I think that markets got a Goldilocks scenario. Full Democratic control to pass stimulus maybe infrastructure but no big reforms. One objection from Joe Manchin, a Democratic moderate, would derail market-unfriendly policies.
Joseph Trevisani: I think the Democrats will largely resist the wilder effusions of their socialists, Biden if he is anything is a man of the Washington consensus. True, I doubt Manchin would oppose his party by himself. He talks for his very conservative voters but he almost always votes with the leadership.
Valeria Bednarik: Won't discuss how leftist Biden is or not, but you can't deny equities are rallying on hopes and relief...
Joseph Trevisani: The Democrats almost lost the House, and I am sure they remember the Tea Party. So I agree. Spending and no controversial legislation.
Yohay Elam: Popular policies such as stimulus checks, aid to states, infrastructure, could receive the support of some moderate Republicans as well, such as Collins and Murkowski. Any change to healthcare and even tax hikes on the very rich would face opposition. Nominations will be easier after the blue wave. Markets will likely watch Yellen.
Joseph Trevisani: Lets assume the $2000 stimulus passes. The equity markets seem primed for a run. I remember from about 15 years ago there was a book titled Dow 30,000. I wonder if the sequel would be Dow 50,000?
Valeria Bednarik: That's a bit out of my sight for now... he!
Yohay Elam: Maybe in 2022.
Valeria Bednarik: As you say, let's assume that stimulus passes... would it be enough to boost consumption, or create inflationary pressures? I don't think so. It's a Lil patch. Doesn't solve the issue.
Joseph Trevisani: No, I don't see inflation ahead. The 10-year Treasury yield closed above 1% yesterday.
Valeria Bednarik: Yet, once again, markets are hopeful immunization is the answer.
Joseph Trevisani: I think the Fed will let rates rise gradually, that should help the Dollar.
Valeria Bednarik: Yeah, agree.
Yohay Elam: Higher yields, in expectation of more debt due to stimulus have boosted the Dollar.
Valeria Bednarik: But temporarily.. and it holds near multi-year lows against most major rivals. So far, the dollar's gains are insignificant in the wider view.
Yohay Elam: I also think these dollar gains are temporary. Because of Powell's power.
Joseph Trevisani: Yes, but not much as of yet. It may be a new day, but it barely past dawn.
Yohay Elam: In the UK, the government and the Bank of England worked in tandem. Announcing QE and government spending on the same day. Maybe Powell and Yellen will work in tandem as well. More QE would weigh on the Dollar.
Valeria Bednarik: Yeah, what a couple we'll have! interesting times not over.
Yohay Elam: We're having this conversation ahead of December's Nonfarm Payrolls.
Joseph Trevisani: If the vaccine tamps and then end the pandemic, which is the market assumption, I think we get a dollar recovery.
Valeria Bednarik: Ahh good all times when NFP actually mattered...
Joseph Trevisani: The omens are not good for December NFP, you have to take the under on an over/under bet.
Yohay Elam: There are concerns about the South African variant being vaccine-resistant.
Valeria Bednarik: Markets are anticipating an awful reading, yet I don't expect much of a reaction.
Yohay Elam: I think that job losses of over 100K could trigger some concerns. But bad news could turn into good news if Super Powell comes to the rescue.
Valeria Bednarik: Umm I doubt it. Powell is reluctant, at this point, he needs first to change it stance, and then convince us all that he did.
Joseph Trevisani: I tend to agree, a loss in December NFP will be seen as the bottom of a bungee jump.
Yohay Elam: He left the door open to additional QE. A weak labor market + massive government spending could convince him to walk through that door.
Joseph Trevisani: I don't think Fed will do much on one month's NFP.
Valeria Bednarik: But he also pledged for fiscal stimulus in the last few minutes. Somehow, rolling the ball outside his side of the court.
Joseph Trevisani: It would unnerve the markets since a bad number is expected and the equities are higher.
Valeria Bednarik: Stocks need little to rally.
Joseph Trevisani: From a speculative point of view, a turn in the Dollar may be approaching.
Yohay Elam: Blue wave? Great? Split government? Great. The rise of the dollar and stocks together is a correlation breakdown. And supports the case for a turn in the Dollar. I still have my confidence in the Powell Put.
Valeria Bednarik: I'm not sure where to put my optimism honestly. Against the market's belief, I'm pretty sure things will keep worsening this year and an economic comeback will be delayed. Yeah, equities could keep rallying with Powell, but at some point, they will have to give up to reality.
Joseph Trevisani: The basic assumption of economic growth, probably rapid for a few quarters, is based on the retreat of the pandemic. Val is right, it is speculative at this point. Things are certainly worsening in California.
Yohay Elam: As long as vaccines work, I'm a huge optimist. We're at the darkest before dawn.
Joseph Trevisani: Yes I agree, that is the market position.
Valeria Bednarik: Yups, and I think that the dollar will recover its crown with the first solid signs of economic recovery.
Joseph Trevisani: I agree with the Dollar also.
Yohay Elam: Vaccines suffer from bottlenecks related to regulation, production, and distribution. It will like to be over within a couple of months.
Valeria Bednarik: Not saying vaccines don't work. I'm just saying it will take much longer than currently believed. And the longer it takes, the slower be the recovery afterward. We are habit animals and we have had a full year to create new habits that don't match the levels of consumption required to keep an economy growing.
Yohay Elam: Yep, the longer it takes, the deeper the scars.
Joseph Trevisani: True, though I for one miss restaurants in NYC. It is hardly the same place now.
Valeria Bednarik: See? but you are now getting used not to have them.
Joseph Trevisani: Yes, unfortunately.
Yohay Elam: I will not return to the gym now that I have all the equipment I need at home and all the videos.
Joseph Trevisani: Same here. I think the percentage of people working at home will be the major economic shift and it has major implications for cities, real estate, taxes, and politics.
Valeria Bednarik: So, uncertainty is always the name of the game. Could be dressed as Brexit, or change to Trade War, or now pandemic. But uncertainty is our motor.
Yohay Elam: My parents avoided investing in stocks their whole lives. No amount of statistics, logic, or economics could convince them equities were worth the risk.
Valeria Bednarik: Yeah, which company needs now millions of dollar's buildings?.
Yohay Elam: If everybody knew everything and behave rationally, financial markets would be unnecessary.
Valeria Bednarik: Yeah point for you.
Joseph Trevisani: Yes, but from a market point of view the changes brought on by homework will mean growth If even a modicum of people and markets behaved rationally we would be extremely bored... and another species.
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