- US futures point to new record highs.
- Senate proceedings unlikely to derail risk-on sentiment.
- Investors still focused on incoming US fiscal stimulus.
- Powell speech, US inflation data may offer more reflation trade signals.
Former US President Donald Trump’s second impeachment trial in the Senate has just been given the green light to proceed and opening arguments are set for noon Eastern time on Wednesday. Trump’s chances of being acquitted are high, considering that the Senate must have a two-thirds majority or 67 votes to find the former president guilty. In other words, Democrats would require at least 17 Republicans to vote to convict Trump, which is a tall order, to say the least.
The good news for markets is that lawmakers on both sides are hoping for a swift trial. Republicans want to limit the political fallout, while Democrats hope to quickly move on rolling out President Joe Biden’s policy agenda. The shorter timeframe for Trump’s second impeachment trial would mitigate the risk of political noise disrupting the risk-on environment in global financial markets.
At the time of writing, futures contracts for the S&P 500 are edging higher in an attempt to erase Tuesday’s declines. Asian stock markets are mostly higher, the dollar is little changed, and gold is edging upwards.
Markets continue to pin hopes on fiscal stimulus rollout
Global investors are likely to ignore any political drama emanating from the Senate during this trial unless it has repercussions on the progress of the next round of US fiscal stimulus.
President Biden’s $1.9 trillion proposal faces dilution risks, even as he extends his hand across the political divide in a bid to obtain bipartisan agreement. Yet markets appear more concerned about the timing of its rollout rather than the headline figure, hoping it will arrive sooner rather than later.
Should this show of partisanship in the Senate amid the impeachment trial bleed over into fiscal stimulus talks and delay its rollout, that could trip up risk-taking activities in the markets.
In focus: Powell’s speech, US January inflation
The reflation narrative in the markets will have one eye on Fed Chair Jerome Powell’s speech, as well as today’s release of the US January CPI figures. Investors are already trying to pre-empt when the US economy will experience the inflation overshoot that’s expected to be driven by more incoming fiscal stimulus. Such conditions might trigger the much talked about Fed tapering, which may then pave the way for higher interest rates. More clues about that timeline would help global investors ascertain their allocations in equities versus bonds.
Powell may attempt to bat down bond yields once more after the 10-year Treasury yield touched the psychologically important 1.20% mark earlier this week. Such comments would push the dollar index (DXY) lower while lifting gold prices.
However, should the January inflation data show another month of tepid price pressures as forecast, that would dampen bullion demand while offering support for the DXY.
