It looks like investors are once again ignoring the impact of COVID restrictions and lockdowns, focusing instead on the implication of vaccines on travel and the potential return of normalcy in 2021, as well as the potential for further dovish rhetoric from central banks. Meanwhile, chatter that the UK and EU were on the verge of potentially agreeing to a Brexit deal also helped to soothe some nerves. The insatiable appetite for risk thus remains high, although that’s not to say haven assets are doing badly.
In fact, as the dollar continues to fall, buck-denominated metals are shining brightly today, not least silver which is on the verge of a big technical breakout
. European stock indices were mostly higher, although US indices were giving back some of their earlier gains at the time of writing. The weaker dollar was providing a boost for currency pairs such as the GBP/USD, which has found further support on renewed Brexit-deal hopes, and the AUD/USD, which has been lifted further by stronger Chinese industrial production and retail sales data published overnight.
As the coronavirus restrictions and ongoing Brexit uncertainties are going to weigh on short-term economic activity, central bank heads at this week’s key policy meetings are all likely to provide assurances that further support will be provided if needed and that the current loose policy stances will remain in place for as long as necessarily.
Fed weighs short-term risk against vaccine-boosted 2021 outlook
As far as the US Federal Reserve is concerned, well it is most likely going to keep its policy largely unchanged on Wednesday but make subtle changes to keep the stock market bulls happy. Like the ECB, it will undoubtedly ramp up its dovish rhetoric and emphasise the need for more fiscal support due to the still-deteriorating pandemic. Indeed, while the outlook for 2021 has improved due to the rollout of the coronavirus vaccine, the short-term picture has deteriorated. But I reckon that if the Fed were to make any changes, it would be shifting the bulk of its bond-buying to longer maturities given the recent rises in bond yields – all in order to keep long-term yields low. But if the Fed refuses to do this, then we could see a negative reaction in the markets as investors fret about rising bond yields. Even so, the potential negative reaction is likely to be limited as after all, the financial conditions would still remain extremely accommodative and for a long time anyway.
So, heading into the Fed meeting, it is mostly risk-on across the financial markets and I don’t think that will change much. That’s unless the UK crashes out of the EU without a deal and/or the Fed turns out to be surprisingly too hawkish in its policy statement and assessment of growth and interest rates.
Source: ThinkMarkets and TradingView.com