Market Drivers Dec. 17, 2020
- Dollar down across the board
- Equities higher in post Powell bump
- Nikkei 0.18% Dax 0.62%
- UST 10Y 0.92
- Oil $48
Gold $1873/oz. - BTC/USD $22721/oz.
Asia and the EU
- EUR PMI 49.8 vs. 45.8
- GBP PMI Services 57.9 vs. 55.9
US
- CAD CPI 8:30
- USD Retail Sales 8:30
- USD FOMC 14:00
The dollar remained weak in the post-Powell reaction while equities were higher in Asian and early European trade as risk on flows continued to dominate.
Chair Powell was as dovish as ever, noting that inflation was not a threat, that large fiscal deficits posed no problem given the low interest rates and that rates themselves were likely to remain near the zero bound for quite a long time.
Overall, it was a performance designed to reassure the markets that the Fed stood ready to support any and all expansion of the fiscal space as it maintained a policy of ultra-accomodation in order to help revive the economy.
Market participants continue to bet on some form of US stimulus before Congress adjourns for the holiday break and all indications suggest that lawmakers will strike a compromise deal albeit a much more modest one than originally planned. At this point much of the upside is factored into the price of equities and any news of the deal should have only modest upside potential. On the other hand, if the lawmakers fail to reach a compromise the negative shock is likely to be far more severe. Yesterday’s Retail Sales data showed clearly that the US consumer is slowing markedly and even on-line spending was far more modest than anticipated.
All of this suggests that the US economy may be tipping into a recession and with much of brick and mortar businesses closed in the coming weeks due to COVID lockdowns the demand picture will only grow worse unless fiscal stimulus helps offset the contraction.
In FX the dollar was weaker across the board with cable especially strong as it tested the 1.3600 figure. Brexit talks are ongoing with Barnier noting that talks are showing good progress. Here just as in equities, the positive scenario is a foregone conclusion and again the asymmetrical risk is to the downside, but for now momentum reign supreme and pound bulls are firmly in control.