The first week of the new year on the markets began with an unexpectedly sharp strengthening of the US dollar and a drop in demand for risky assets due to the tensions over the possibility of asserting the presidential winner Joe Biden as president.
This event fact and the problems with mass vaccination of Western countries’ population were in the markets’ focus. Investors did not even pay attention to what happened on January 6 in Washington, concentrating on the new president’s possible economic policy, which in the general opinion, can contribute to the continuation of stimulus measures. It was the reason for the resumption of growth in stock indices worldwide.
On Thursday and Friday, investors finally turned their eyes to the critical economic data coming out. In Europe, the attention was on consumer inflation, which remains in negative territory, as does retail sales. The expansion of restrictions due to the coronavirus pandemic contributed to these weak statistics and will affect the European economy’s ability to recover this year vigorously.
On Thursday, the United States’ strong values of the purchasing managers’ index brought positivity to the markets, pushing the world stock indices. Regarding the US employment data released on Wednesday and Friday, which turned out to be extremely negative, investors perceived it as an argument that Joe Biden’s administration will be forced to pump up the financial system further. It is a strong supporting factor for the growth of demand for company shares and other risky assets.
In my opinion, it’s a threat to the economy because it leads to the continuation of inflation of financial bubbles, especially in the United States, which will eventually burst. But the markets are not thinking about it yet, living in the moment. Investors believe that the worse the economy’s situation is, the more dollars they will get through various assistance and incentives measures, which means they will continue to buy shares of companies and commodity assets.
The question is, why did the dollar receive support last week? According to the tradition developed in recent years, it had always weakened when the demand for risky assets grew. I can explain this by a strong growth in Treasury yields, which supports the dollar rate.
Thoughts and conclusions:
How events will develop in the coming week will depend on the upcoming statistics. In general, I believe that the upward trend in stock indices will continue, but the possibility of the strengthening of the dollar may be questionable. It is necessary to monitor the dynamics of the yield of American Treasuries closely. If it stops and even begins to correct downward, the dollar will likely resume its decline in the currency markets