- Delays in Biden’s relief timeline keep animal spirits in check
- Euro/dollar retests key support region as Eurozone troubles grow
- Gold in a holding pattern, waiting for the next catalyst
- Have retail traders ‘broken’ the market’s plumbing?
Volatility is back
It’s been a hectic start to the new week. US stock markets took a sharp dive on Monday for no apparent reason, but quickly recouped those losses and still managed to close at record highs. It seems that an army of retail traders have ‘broken’ the stock market’s plumbing, sparking short squeezes left and right by piling into some of the most heavily shorted names in a hive-like manner.
The explosion in retail trading during the pandemic has given rise to all kinds of weird phenomena, but yesterday was the clearest example as the insanity in smaller names was enough to briefly kneecap the S&P 500 itself. This eruption in volatility seems to have reignited fears about a speculative bubble that is powered by cheap money policies.
Back in the real world, it seems that Biden’s relief proposal will be delayed until mid-March, according to Senate majority leader Schumer. This means the stimulus bill will come after Trump’s impeachment trial, which is not a market-friendly priority order. Meanwhile, Republican senators are arguing for ‘targeted’ relief measures, which is a euphemism for ‘less’ than what Biden proposed.
Faced with the risk that the new stimulus package will be both delayed and watered down, markets are in a more cautious mood on Tuesday and Wall Street is set to open slightly in the red.
Euro/dollar finally pricing in economic divergence?
Things are calmer in the FX arena, where the US dollar is trading a touch higher, capitalizing on the broader defensive tones. The spotlight is on euro/dollar, which is testing its 50-day moving average near $1.21, a support region that has been a fortress lately.
On the fundamental front, the euro area is going from bad to worse. German Chancellor Merkel is warning that the nation’s pandemic has ‘slipped out of control’ and is calling for stricter measures to rein in the contagion, while France could go into another lockdown at any moment now. On top of everything, Europe has been hit by serious delays in vaccine deliveries.
Hence, the euro area economy is likely to suffer at the hands of more shutdowns, might be the last major region to make a full recovery given its immunization troubles, and there is no real political appetite for gigantic relief packages. The economic divergence with America is likely to become clearer going forward, keeping the risks surrounding euro/dollar skewed to the downside.
That said, for now the pair’s immediate path may be decided by how risk sentiment evolves, how dovish the Fed is tomorrow, and the political turmoil in Italy. Italian Prime Minister Conte resigned yesterday and will attempt to form a new government with backing in Parliament to avoid a snap election.
Gold trapped in ‘no man’s land’
In the precious metals space, gold has been exceptionally quiet this week, staying trapped in a very narrow range between its 50- and 200-day moving averages. It is striking that bullion hasn’t posted any meaningful gains lately, even as real 5-year US Treasury yields plummeted to new record lows.
The recent recovery in the dollar may be what is keeping a lid on the yellow metal. For now, a break either above the 50-day average at $1857 or below the 200-day average at $1846 could reveal the next wave.
Looking ahead, the ‘sweet spot’ for gold may be around April-June, as inflation fires up but the Fed is still reluctant to discuss QE tapering. However, once the tapering discussion begins, the longer-term outlook would shift to negative.
As for today, all eyes will be on corporate earnings, including from Microsoft, 3M, Johnson & Johnson, and many others.
