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  1. Reflation bet in the US appears to be gaining traction US futures and European stocks resumed rally anticipating more bullish updates from the new US administration. We saw fresh highs in S&P 500 yesterday and extension of bullish sentiment in today’s session with SPX futures hitting new peak at ~ 3860 point. Recall that we discussed possible reasons of market participants to increase their exposure in US stocks. Breaking down returns of US equity markets by indexes and taking the start of 2021 as the starting point, we see strong evidence that investors are increasing their bets on r
  2. Three reasons for uneven equity markets growth in 2021 Stock indices of advanced economies rose on Wednesday, large ETFs investing in emerging markets saw moderate inflows on Tuesday. The speech of Janet Yellen who assumes the office of the US Treasury secretary affirmed that not only a short-sighted approach will continue in the US fiscal policy, but it may become even more pronounced. Yellen’s remark about the need to “act big” ignoring growing public debt issues was basically a signal that she, as a head of the Treasury, favors further debt accumulation as a remedy for short-term ec
  3. USDJPY and Biden fiscal plans There was only a brief pause of stocks in terms of bullish headlines from the US government: starting from the last week, we observe development of the store with a new aid package from the Democrats who have finally grasped full power. The size of the expected support is being revised very quickly: last week Goldman estimated the amount of stimulus at $750 billion (of which $ 300 billion will be distributed in the form of stimulus payments), then there were estimates at $1 trillion, $1.3 trillion, and before Biden's today's address to the Americans, the mar
  4. Inflation expectations rise in the US. What does it mean for a new fiscal stimulus? Judging by the recent developments in the US money and Treasury markets investors start to expect that the Federal Reserve will start to normalize policy sooner than expected earlier. If a month ago a first interest rate hike was expected no earlier than the second half of 2023, this month expectations have sharply shifting closer to present time, pricing in a rate hike at the start of 2023. While consumer inflation in the US is dormant, inflation premium in bond yields is rising very quickly, making it m
  5. There is too much tax uncertainty for US big tech right now. Time for shorts? In my Monday post we discussed why it may be appropriate to short US Dollar in the first half of January. Yesterday we’ve got the first signal of development of this our scenario. USD index (DXY) fell from 90 points to 89.20 on Wednesday, while EURUSD rose above 1.23, GBPUSD tested a new multi-year high at 1.37 while Gold sticks to its plan to climb above $ 2000, and I think it will succeed. Recall that the key chart I recommended to keep an eye on is the odds of Democratic win in Georgia run-off elections:
  6. Two reasons to sell USD in January The beginning of the new year was not distinguished by any surprising moves in FX space. USD remains under heavy pressure, ceding ground to majors, comdollars and EM currencies. It was though unusual to see that USDJPY and USDCHF (i.e. safe-haven vs. safe-haven pairs) also saw sharp downside moves. There are two ideas of why the USD can test new lows in the first half of January. The first idea (the macro one) which drives USD fall is that no global central bank can beat the Fed in easing monetary policy. Recall that following the Fed meeting
  7. Key near-term risks for risk-on. USD targets for the next week Risky assets saw modest losses on Friday amid the emergence of a new roadblock in the stimulus package negotiations - Republicans' proposals to restrict the Fed and the Treasury to use credit facilities created in response to the pandemic. In particular, this concerns the Main Street program (direct lending by the Federal Reserve to small and medium-sized enterprises), which expires at the end of this year. Democrats see this as an attempt to tie the hands of the Biden administration (in terms of ability to respond to pos
  8. Explaining 10yr-2yr spread and Fed’s meeting baseline scenario. Near term USD outlook Decline of US Dollar accelerated on Wednesday before the Fed meeting as the consensus strengthened that the US Central Bank will float additional monetary easing measures today. On Monday we discussed the possible forms of this easing - an increase in the duration of the Treasury portfolio, or an outright increase in QE (which is less likely). QE is when the central bank tries to adjust basic risk-free market rates - government bond yields, through guaranteed monthly asset purchases of some volume. By ad
  9. Is there anything to stop stocks decline except fresh fiscal headlines? The ECB meeting had little chance to send Euro lower: recall that on November meeting, Lagarde warned investors that they should expect a major policy adjustment in December, but since then various ECB officials have been steering market expectations towards much less easing. Which, in fact, happened on Thursday - the bank just raised the limit of the pandemic asset purchase program by 500 billion euros (which in no way obliges the bank to ramp up asset purchases) and increased long-term cheap financing to banks (the
  10. US stocks dodge correction as new US stimulus plan seems to suit both parties US stock market once again dodged looming bearish pullback on Tuesday thanks to positive news on the stimulus package. Treasury Secretary Mnuchin presented a new stimulus plan on Tuesday that takes into account the priorities of both Democrats (funds for federal and local authorities) and Republicans (liability protection for businesses). The news immediately had an effect on the markets - the S&P interrupted the onset of a slump and swiftly climbed above the 3700 mark: Europea
  11. This broken link between banks and bond markets indicates Central Bank support is the only thing that matters for stocks Price action in European equities and US futures lack clear direction on Tuesday as markets wait for a "Christmas gift" in the form of a fiscal deal. In the absence of news headlines signaling about progress in stimulus talks, there is a chance for equity markets to stage a minor pullback (scenario that we discussed yesterday) and the signs of bearish pressure do persist. The greenback remained weak against other majors, trading below the key foothold at 91 points.
  12. A case for a bearish pullback in S&P 500. What could go wrong? US job growth fell short of expectations in November, pointing to waning recovery momentum in the US economy. However, it didn’t stop the US equities from renewing all-time highs. SPX inched closer to 3700 points, DOW rose above 30,000 mark. On Monday, equity markets went into a mild retreat while US currency recovered some of the lost ground. The biggest question is the strength of this downside move. In my view, fundamental background and news flow expected this week suggest that the 3700 mark should remain a local
  13. Oil market appears to be slow to digest OPEC+ new trade-off The new OPEC+ deal appears to be a massive success both for oil producing nations and the market. Agreeing to boost production in January the group could convince market participants that surplus inventories will nevertheless decline. The deal was somewhere in the middle between the worst and the best possible outcome of the meeting. Oil-producing nations will start to increase output from January 2021, but great flexibility of the new plan was a key to soothe market concerns. This week was difficult for OPEC as due
  14. OPEC decision is likely to have short-term impact as focus turns to demand side Positive update on oil inventories in the US pulled WTI above the key level of $ 45, however, prices have been moving in a narrow box as OPEC is dragging its feet on key output decision: EIA data unexpectedly indicated US crude oil inventories declined by 679 thousand barrels. Stocks at Cushing decreased by 317 thousand. Drawdown in inventories was an unexpected outcome which produced some upside in the market as it came against the backdrop of an increase in oil imports and a d
  15. Opposition in OPEC+, Fed’s Powell speech: key events to watch this week EURUSD resumed its movement towards 1.20 on Monday in line with our expectations outlined last week, however buyers are in no hurry to break through the level. Greenback index remains in a mild downtrend and there are no prerequisites for a significant pullback in December. A breakdown of the 1.20 level in EURUSD in the first half of this week will depend on whether OPEC + decides to extend current output cuts. Then the pair will likely pay attention to the macro updates from the US (ADP, NFP, PMI indice
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