As I expected, US politics still plays a prominent role in the economy. Senate Majority Leader Mitch McConnell and Speaker of the House of Representatives Nancy Pelosi, with the participation of Finance Minister Steven Mnuchin, again disagreed on the stimulus program’s details, which financial markets continue to put their hopes on.
So why do we still see the continued rally in the equity markets?
Of course, there is much more politics in these disputes than sober economic calculation. Earlier, I pointed out that President Donald Trump will take revenge on the new President Joe Biden, together with the Republican Party representatives, for the “dirty” elections. So there is an apparent delay in resolving this issue, linked to the general government spending in the country, which must be resolved before December 11. Otherwise, a lockdown will come. It may cause a lot of problems for the new Administration. Of course, they will be resolved, but it will bring a lot of troubles to Biden and his government, taking office in January.
So far, financial markets have not reacted adequately to this news. Everyone is passionate about the beginning of the vaccination process in the UK. Even though the pandemic breaks new records for both the sick and the dead in the United States, this does not bother anyone. Stock indices resumed their growth, which is due to investors’ desire to buy shares of companies hoping that the global economic recovery will be V-shaped instead of the U-shaped predicted in the summer.
The positive dynamics of the Chinese economy is another supporting moment. On Monday, the export data presented was impressive – an increase of 21.1% in November against 11.4% a year earlier. The values of the Japanese economy were also positive. Japan’s GDP for the 3rd quarter grew by 5.3% against the fall of 7.9% a quarter earlier. On an annualized basis, the indicator jumped 22.9% against a 28.1% fall a year earlier. And although the overall growth has not yet reached before-pandemic values, it is encouraging, indicating a substantial recovery of the economy.
In the foreign exchange market, the pound remains a hostage to the Brexit subject that is still important after four years. Conflicting news from the battlefields for a bright future between the EU and Britain remains exceptionally controversial, leading to a sharp drop in the British currency rate, or vice versa.
The euro also continues to consolidate in anticipation of tomorrow’s monetary policy decision by the ECB. The regulator is expected to expand incentive measures. It is still difficult to say how this will affect the euro rate. A lot depends on the general situation in the markets. Commodity currencies have somewhat revived due to hopes for a global economic recovery, but so far remain in a period of consolidation.
What to expect soon:
Overall, I expect that the nervous environment in the foreign exchange market will continue. The dollar will generally remain under pressure due to the two main factors. The first is a high demand for risky assets. The second is investors’ manic hopes that new support measures in the United States will be taken. They believe it will support the growth of demand for risky assets against the general background of the beginning of the vaccination against COVID-19.
As for the stock market, while investors are eagerly reading the news about the beginning of vaccinations in Britain and the negotiation process for new incentives in the US, they will buy despite the risk of a market crash.