The markets have shrugged off the recent volatility event and taken a step higher once again with S&P 500 rising 4.65%, Nasdaq-100 5.25% while Russell 2000 was up 7.7% last week. All these indexes reached another all-time-high. Risk-on sentiment has been prevailing since last week when President Biden’s stimulus package was approved with votes 51:50 in the Senate and the U.S. reached a milestone of 40 doses of COVID-19 vaccine administered.
Biden’s plan to revitalize the U.S. economy has been endorsed by the Senate, voting along the party lines, with a unified opposition from Republicans. Vice President Harris casted her first tiebreaking vote to move forward with approving the U$1.9 trillion spending package. This means that the U.S. growth targets are around 4-5% in 2021 – among the highest in the developed world. On top of fiscal spending, the U.S. economy is also expected to benefit from the re-opening of the economy at the back of the expedited vaccination program. With 40 million people vaccinated, translating into 12% of the population, it would take around 10 months to cover 75% of the population with two-dose vaccine, reported by Bloomberg. Among large developed countries, the U.S is only second to the U.K who has vaccinated 17% of the population. European Union is a laggard with only around 3% of the population having received a two-dose vaccine. The divergence in vaccination progress, combined with faster relative growth expectation, has supported USD against its major counterparts. The US dollar, measured by DXY, broke the 50-period moving average last week, an important resistance level, and is trading now near 91.0. EURUSD is also near 2-month lows of 1.2038, finding support near the 100-day moving average of 1.19600. Also, USDJPY continued trending higher, reaching 105.50 levels, which were last seen in November 2020. Price has been stopped by 200-day moving average but there seems to be energy in the trend which might support further bullish momentum. The strong dollar is expected to exert pressure on risk assets with equities and commodities being the likely victims. But also, emerging countries’ currencies and credit can be expected to take a nosedive, should USD continue to march higher. The reflationary trade that started to show signs of emergence will be forced to take a pause with strong USD and therefore dollar strength is not to be ignored.
Despite US dollar testing levels last seen in 2020 and therefore adding pressure to commodities, we have seen a spectacular rise in oil price in the recent week. Price has shot up to 57.4, levels last seen a year ago. Oil was one of the main beneficiaries of reinflation trade that was supported by vaccine news, Biden’s presidency but also the Blue Wave in Congress. Stockpiles accumulated in Q1 last year are becoming thin, and with the increased demand from China we have seen prices reaching 12-month high. OPEC and its allies have contributed to the shrinking stockpiles – cuts were agreed in April 2020 and since then 2.1 billion barrels of oil have been held back, WSJ reports. In addition, American oil companies have cut back production in 2020 which is presumed to continue with the new and greener administration at the helm at the White House. The final push has come from extraordinary weather conditions prevalent in the northern hemisphere – polar vortex daunting North Asia since late 2020 arrived to North America and Europe in January, bringing freezing temperatures, excess snowfall and with that an increased demand for heating and energy. Higher oil price is expected to push cost inflation up and we could start seeing signs of that already in January 2021 data. CPI data will be the key data point in 2021 with most central banks having committed keeping interest rates low. Once we see inflation picking up, they might withdraw from their commitment, causing havoc in asset and currency markets. .
Have a great trading week ahead!