Thursday 21 January 2021 7:13 am

Before the Bell: Honeymoon in Washington

Joe Biden was sworn in as the new US President overnight with financial markets granting him a DC honeymoon on his first day as the buy everything trade returned with a vengeance.

Jeffrey Halley, senior market analyst atOANDA, said this morning that equity markets soared, as did precious metals, and currency markets saw commodity link currencies outperform at the US Dollar’s expense.

“US bond yields were almost unchanged, as were oil markets as they digest the implications of a flurry of energy-related executive orders from the new President yesterday. Nevertheless, energy prices remain at their recent highs,” according to Halley.

Read more: The inauguration of President Joe Biden in pictures

“For all the noise about the Biden $1.9 trillion stimulus package that we are writing about ad nauseum, and the follow-on remake America spending the new President also wishes to enact, one critical risk remains and is being totally ignored by financial markets everywhere,” he continued.

With financial markets all in on $1.9 trillion, Halley pointed out it could be “an unwelcome surprise” when that number almost certainly gets put on a diet.

“The momentum has clearly swung back to the stimulus-driven, global recovery. However, don’t count out its reappearance once Senate Republicans make their positions clear,” he said.

Enthusiasm on both sides of the pond

Michael Hewson, chief market analyst at CMC Markets UK, told City A.M. this morning that financial markets on both sides of the pond had a positive day yesterday, which was followed by Biden’s speech that talked about unity and bringing the country back together, as well as calling for end to the “uncivil war” of the last few years.

All of the major US equity markets closed at new record highs, he said, while markets in Europe also had a positive session, as investors absorbed the messaging of a new President, and a Treasury Secretary who promised to “act big”, in testimony to US policymakers the day before.

“This enthusiasm over a new stimulus program is likely to filter into a positive European open later this morning, after the Bank of Japan kept its own monetary policy decision unchanged, ahead of today’s ECB rate decision,” Hewson said.

Read more: Christine Lagarde backs economic outlook despite Covid-19 resurgence in Europe

ECB set to stay on hold

ECB President Christine Lagarde may have expressed confidence last week that the banks December forecasts were still valid, and is likely to do the same again today, despite the tightening of restrictions across France, Germany and the Netherlands in recent days, however, it can only be a matter of time before they have to bow to the inevitable.

“No changes are expected today, but it has been apparent over the past 12 months that the ECB has shown it is prepared to shift policy when required in order to support the European economy, despite the lack of urgency from EU politicians in taking fiscal actions of their own,” Hewson said.

He added that they haven’t been helped by a weaker US dollar which has pushed the Euro up above the 1.2000 level against the US dollar and added to the deflationary pressure on an economy that has tipped back into recession, and is unlikely to recover much before the second half of 2021, due to tighter lockdown restrictions that have been in place for most of Q4 last year, and look set to get extended into Q2 of this year.

Read more: Rishi Sunak set to extend furlough scheme past April

“We’ve already heard in the last few days that Germany is extending its lockdown into mid-February, while curfews have been implemented in France and the Netherlands, while yesterday it was being reported that bars and restaurants in France were more than likely expected to remain closed until Easter, even under the most optimistic scenario,” Hewson said.

This would appear to suggest even more economic pain in the weeks and months ahead, at the same time as the vaccine program gets off to a faltering start, he explained.

In December the ECB expanded its Pandemic Emergency Asset Purchase program for the second time in 2020, from €1.35 trillion to €1.85 trillion, as well as extending it another nine months until March 2022.

“While this helps buy time, along with new loan programs in the form of TLTRO’s, the ECB can’t act alone given it is already operating at the limits of its mandate,” Hewson said.

“It needs help on a much bigger fiscal scale, which at the moment is only just coming in a fairly limited form in the form of the EU recovery fund, and only €390bn of the €750bn of that fund, in the form of grants, far too low to really make much of a difference,” he noted.

Read more: Hospitality sector urges Sunak to extend business rates and VAT support

European economies

While the ECB has gone to great lengths to insist that their monetary toolbox still has plenty of ammunition to deal with the prospect of a double-dip recession, the rise of the euro and a weaker US dollar is not helping their cause.

“We are now finally seeing fiscal stimulus on a large scale on a country level with Germany leading the way in that regard, with the temporary suspension of the fiscal compact, however this stimulus is being delivered very much on a localised basis, as opposed to being on a pan-European level, with Italy, Spain and Greece in the most economic need,” Hewson said.

He stressed that events in Italy also aren’t helping as politicians there “squabble” over how to spend their portion of the recovery fund. “While the additional money is extremely welcome it will probably be more than likely wasted, given the lack of appetite amongst Italian institutions to implement the types of reform necessary to make the economy perform better in the longer term,” he said.

With the damage from the pandemic likely to extend well into 2021, Europe seems no closer to getting its act together politically, as well as fiscally, raising the prospect that further economic schisms could open up over the next three to six months, Hewson concluded.

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