The New Year in the financial markets began with a strengthening of the US dollar and a slight decrease in demand for company shares after the American stock indices reached new historic highs. The situation changed dramatically after Joe Biden’s official recognition as the US President by the US Congress. However, the general picture on the markets remains so unambiguous.
How will the Biden presidency affect investors and what should we expect from the markets soon?
At the beginning of the new year, the negative sentiments were primarily due to the political tensions over the transfer of power from the 45th president to the 46th. Besides, the slow process of mass vaccination against the COVID-19 in the United States and other Western countries and the extremely weak employment data for December played a role and contributed to a decrease in demand for company stocks while strengthening the US dollar.
Such a sharp change in market sentiment, despite Congress’s adoption of the stimulus measures, can be explained by the upward reversal of the US Treasuries’ yield. From January 5, the 10-year T-Note benchmark yield jumped from 0.922% to 1.119 on January 8. It was the strongest weekly gain in yield since May 2020. Investors likely believe that this rise in profitability is associated with higher expectations of an increase in short-term interest rates, which is negative for the demand for company shares and is a supporting factor for the dollar.
How long will this process last? I believe that both the Fed and the new Biden government will try to do everything to support the national economy. However, investors are somewhat frightened by the prospect of a tax increase promised by the democratic presidential candidate. As for the dollar exchange rate dynamics, the US economy desperately needs its low exchange rate so local producers would compete more effectively in world markets. It means that perhaps soon, we should expect some fiscal relief, despite Biden’s election promises.
What to expect soon:
If the correction in the US’s stock markets continues, it will be short-term and only so investors will start rebuying shares of companies at acceptable price levels. As for the dollar exchange rate, its dynamics will largely depend on the new government’s actions. Easing political tensions and reaffirming fiscal soft monetary policy will lead to renewed depreciation of the US currency.