On Tuesday, the stock markets were optimistic about the programs’ prospects to stimulate the economy in the EU and the US.
Investors have been waiting for the news on these topics for a long time. I want to remind you that earlier in the EU, the topic of the Fund for Assistance in Crisis Situations was discussed. Also, before the presidential election in the US, there was a heated struggle for assistance measures.
So what happened?
On Tuesday, it became known that the euro area’s finance ministers agreed to strengthen the regional crisis assistance fund for 750 billion euros. Against this background, the main currency pair EURUSD soared by more than one figure and confidently consolidated above the level of 1.2050. As for the European stock market dynamics, it grew, but the increase was not so optimistic. Widespread measures to limit social activity in Europe still continue to have a noticeable negative impact, reducing the region’s economic activity.
At the same time, the announcement in the United States of a $900 billion consensus stimulus package to fight the consequences of the COVID-19 pandemic has led to a sharp increase in demand for company shares and the new historical highs of S&P500 and NASDAQ100 indices. This news also supported the weakening of the dollar against the euro and in the currency markets in general due to expectations that the adoption of stimulus measures will again put pressure on the dollar due to an increase in its supply in the financial system.
In general, it’s safe to say that investors are trying to buy as many shares of companies as possible. Moreover, it seems that they are ready to buy anything hoping that the beginning of vaccination in January next year will lead to the growth of the world economy in general and the American economy in particular. Market participants completely ignore new records of the COVID-19 victims, as well as mortality from this infection, which clearly indicates the most substantial shift in market sentiment.
Despite such a strong positive sentiment, I believe that the risks of the beginning of a correction this month have grown significantly. The shift in demand towards the purchase of risky assets is similar to cruise ship passengers’ movement on one side, which can lead to a tilt of the vessel and the risk of overturning. I believe that the resumption of profit-taking after a very successful November may cause a landslide fall in stock indices with a simultaneous rise in the US currency.
What to expect soon:
It’s clear that now investors buy shares in any situation due to the hopes for a faster recovery of the American economy. But there is a significant pitfall that they seem to ignore. The big market players continue profit-taking after a November rally, which may serve as a basis for a deep correction. I believe that this risk is growing daily.