Muted Reaction To $1.9Tn Stimulus

Fundamental analysis of Forex market
  • Biden’s long-awaited announcement prompts risk-off.
  • Markets wary of hikes to corporate taxes, minimum wage.
  • Fed’s continued support to limit Gold’s downside.

Asian stocks are mixed while US futures are pushing lower, even after US President-elect Joe Biden unveiled his $1.9 trillion fiscal stimulus plan. There appears to be a some ’sell-the-news’ price action in equities, given that a lot of the optimism surrounding another injection of US fiscal stimulus had already been priced in ahead of the keenlya waited announcement.

Markets are also understandably apprehensive following Biden’s foreboding remarks in addressing his proposal’s costs. A seemingly exhausted stock market reacted to the threat of higher taxes and the intended hike in the minimum wage by taking some risk off the table and booking some profits.

Promise of more fiscal stimulus may come with caveats

There is already chatter that the incoming Biden administration may not stop at just $1.9 trillion and could roll out more fiscal stimulus. Although such expectations have in the recent past buoyed risk assets, investors may refuse to get carried away with more of the same headlines.

If the incoming fiscal support is accompanied by more risksentiment dampeners, such as the threat of heightened regulations, that may not give equities such a big boost. Execution risks remain for any such fiscal stimulus, while it remains to be seen how much of Biden’s proposal will remain intact once it passes through Congress. The package should get through the House relatively smoothly, but the Senate is a different matter with a 50-50 split only broken by Vice President Harris’ casting vote in the event of a tie.

Pandemic woes still evident

Investors will have plenty to digest over the long holiday weekend for US markets due to Martin Luther King Day. Besides the promise of more fiscal stimulus, market participants have to reconcile the still-heady heights in stock markets with the sobering current realities of the pandemic. Covid-19 cases are still raging throughout the US and Europe and the vaccine’s rollout will take time to have its intended effect on the real economy.

In the meantime, the country’s dire need for more support couldn’t be starker. Thursday’s weekly initial jobless claims rose back towards the one million mark to post its highest figure since August and more signs of economic angst may also be unveiled later today. US retail sales may show zero growth in December, while consumer confidence is expected to have dipped this month.

Gold climbs as Powell hushes tapering talk

Gold got a slight lift as US 10-year yields dipped to the 1.11 percent level, after Fed Chair Jerome Powell poured cold water on talks surrounding a potential pullback in the central bank’s bond-buying programme. Although 10-year yields remain significantly lower than pre-pandemic levels, they have remained stubbornly above the psychologicallyimportant one percent mark since the breakout last week.

With the Fed Chair pledging to provide ample warning time before any such tapering so as to avoid a repeat of the infamous ‘taper tantrum’ of 2013, Gold bulls can take heart from the continued central bank support that should limit the precious metal’s downside for a while longer. Still, Gold bulls will have to eventually face up to the realities of the Fed’s tapering as the US economy’s post-pandemic recovery resumes.