Market Overview

17 December 2020

The Fed Just Helped the Stocks to Rise and the Dollar to Dive


On December 16, the U.S. Federal Reserve (Fed) issued a regular statement of the Federal Open Market Committee (FOMC) and shared its economic projections. The members of the Board of Governors reaffirmed their readiness to use a "full range of tools to support the U.S. economy in this challenging time", including all the necessary asset purchases, which "help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses". The Fed will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month "until substantial further progress has been made". And the Committee not only decided to keep the target range for the federal funds rate at 0 to 1/4 percent right now, but 12 of 17 members also explicitly gave a forecast that the interest rate would be kept at almost zero levels at least throughout the period until the end of 2023 (see the picture below).

Target levels for the Federal Funds Rate until 2023 and longer run

Source: Federalreserve.gov

The overwhelming majority of the committee does not see even an initial rate hike for another three years to come, and four of the five opposing members expect just a small rate increase, limited by only 0.5% in 2023. This may suggest that the period of zero interest rates could be if not "eternal", then very, very long. Such moves were expected and have proven to be true,  mathematicians could call this the Fed’s "theorem". An inevitable work scope for the American "money printer" caused another wave of the U.S. Dollar depreciation, as the Greenback quickly lost again a part of its value against the basket of major reserve currencies. EUR/USD jumped far above 1.22, which has not been seen since April of 2018, and AUD/USD almost reached 0.7650 after the levels near 0.70 just two months ago, and the next serious technical resistance for the Aussie is at the 0.8130-0.8160 area, where it was in May of 2015 and in January, 2018.

Even the British Pound freshly renewed its two-year high above 1.36 vs the U.S. currency after the European Commission President Ursula von der Leyen remarked on Wednesday: "As things stand, I cannot tell you whether there will be a [post-Brexit trade] deal or not. But I can tell you that there is a path to an agreement now. The path may be very narrow but it is there." The next few days will be critical for  the final negotiations. Both sides have made contradictory public statements many times and the deadline for an agreement on a deal was moved again, but markets seem to bet on a happy ending before the final legal deadline of December 31.

Gold spot prices rose to $1882.88 per troy ounce this morning after a short-time trial to touch $1845 support, as an immediate response to the Fed’s news. When traditional currency assets are diluted more and more, and there is no strong reason to buy the U.S. bonds for the shelter, precious metals become popular again among the fund managers who strive to balance their portfolios consisting mostly of rising stocks. As the Fed's oath to provide enough free liquidity to banks and the economy helped to push the broad-based S&P500 index to its new historical record above 3720 points, some investors also may even add some shares to their portfolios and cover them with some volumes of gold contracts too.

The brave bond-buying program has seen the Fed's balance sheet rise above $7 trillion, but the U.S. financial regulator appears in no hurry to adjust the pace of purchases, and this flow of free liquidity continues to support the global stocks' Christmas rally. More support came from a positive change to the Fed's forecast on real gross domestic product (GDP) from -3.7% to -2.4% for 2020, and from 4.0% to 4.2% of the expected recovering growth in 2021. These changes in the forecast were made despite the current situation with a clearly weaker demand in both the U.S. and Europe, when economic activity and employment have continued to recover but remain well below their levels at the beginning of the year.

"The pandemic is causing tremendous human and economic hardship across the United States and around the world," the FOMC statement said, but the chairman Jerome Powell was moderately optimistic about the future at his press conference stating that economic recovery is progressing. "Our guidance is outcome-based and is tied to progress toward reaching our employment and inflation goals. Thus, if progress toward our goals were to slow, the guidance would convey our intention to increase policy accommodation through a lower expected path of the federal funds rate, and a higher expected path of the balance sheet,” Powell said. “Overall, our interest rate and balance-sheet tools are providing powerful support for the economy and will continue to do so. Together, these measures will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete,” he added.

As markets are generally soaring higher, some partial profit taking in most gaining shares have begun. The following are just two examples of how it works. The new ambitious plans of Star Wars and Marvel shows on Disney+ streaming services that already collected 86.8 million subscribers. Thus, Disney+ reached the upper end of the goal it previously set for 2024, which underpinned Walt Disney's shares price tremendously last Friday. Disney prices saw a new all-time high at $179.45, but this week it adjusted just to $168 per share temporarily, and now it is trading higher again. During a marathon investor day presentation, Disney's CEO estimated the company may attract as many as 350 million global subscribers across all of its streaming services, and armed with all fresh content, Disney will also raise the price of Disney+ by $1 in the U.S. to $7.99 per month and by €2 in continental Europe to €8.99. Starbucks coffee restaurants network, which jumped in price above $105 per share and also showed its new historical high this December, is not at all in a hurry to go back under its $100 psychological support after the chain of coffee houses said at an investor event that it plans to increase its store count to about 55,000 by 2030, up from roughly 33,000 today, as it saw a “significant” 2021 rebound.

Perhaps, the so-called Santa rally could have been even more convincing if markets did not have to be more cautious, to some extent, because of the following two issues. The first has to do with the fact that the U.S. stimulus package has not yet been released in spite of all the media leaks from bipartisan congressional negotiators. The second issue is even more serious. Some volatile market motions on a possible U.S. political storm are within visual range on a horizon, with the possibility of its sudden outbreak being ready to commence even before Christmas time. This may not be a proper time for the markets to relax after the mainstream media proclaimed that the Electoral College voted for Biden as a president-elected, because it's not the media who is going to appoint the next president of the United States. The thing is that the duelling, or alternative, Electoral College votes from another group of electors for Donald Trump, appointed by swing state legislators, were collected by the team of the sitting President Donald Trump who is not going to concede.

This alternative set of electoral votes could also be presented not only to the Congress on January 6 but also in the new lawsuits from those swing states to the Supreme Court again in the coming days. And also John Ratcliffe, who is the Director of National Intelligence service and Trump's staunch ally, is going to present a bombshell report on an alleged foreign, especially Chinese, interference into the U.S. 2020 election process through the Dominion machines system and by other methods. Of course, this is unlikely to convince the Congress to overturn the elections, but it may become a formally legal reason for the acting President to declare a martial law and to try his luck with all the ensuing consequences for the election results. No matter how improbable such a scenario may seem by the media, there is no reason to discard it. Even CNN reported today that, according to their sources' information, Donald Jr. Trump is not going to leave the White House of his own free will on the day of Joe Biden's alleged inauguration on January 20. So, the story is not over.


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.


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