Intraday Market Thoughts

The Big Trends, The Big Questions

by Adam Button
Dec 16, 2020 17:51

The FOMC announcement is due in abt 1 hr from now & Powell's Q&A follows half hour later. For more on that, see yesterday's IMT and the premium video below. Let's look beyond today's Bitcoin 20K & latest USD damage. One danger in FX trading is to get bogged down in the details and lose sight of the big picture. There are dominant themes at the moment. The Pre-&-Post Fed Premium video is posted below. 

1) Post-pandemic thinking

The market is looking beyond the pandemic. Companies that can be debt and cash-flow neutral in 2021 are being valued based on post-pandemic scenarios. That means that even fresh virus shutdowns are quickly discounted.

2) Loose fiscal policy

A big reason is that it's so easy to look past the covid-19 pain is that governments are shouldering much of the corporate and personal burden. To various degrees, governments have provided extensive support that will keep the vast majority of companies and people out of bankruptcy. This theme bears watching closely as the pandemic is prolonged and stimulus winds down. The vaccine is ahead in this race but visibility on small businesses and renters is low.

3) Loose monetary policy

This year showed that monetary policy is more-powerful than almost anyone previously believed. Acting in tandem with the fiscal side, it took an economy on its knees and sparked a sensational bull market. Had officials delivered anywhere near this kind of response in 2008, there would have been no financial crisis or recession. The correlate to this is that a tightening of monetary policy will be more painful that previously believed. We got a taste of this in the taper tantrum and Powell's short-lived flirtation with tighter policy in 2018. In the future, the kicking and screaming will be even more violent.

4) Low inflation

A bet on continuing low inflation is at the core of all of the above factors. It allows governments to borrow and central banks to keep rates low. Powell is so confident that inflation will stay depressed that he's pledged to keep rates low until 2024. Already though, price pressures are rising led by commodities. The prices paid component of Tuesday's Empire Fed was the highest since 2018.

5) Globalization

It's unclear where the +30-year trend towards globalization stands. Brexit and Trump may have marked the end of increasing integration but it's not yet clear that we're in a full-scale retreat, or how fast it might go. Biden's win and a smooth Brexit combined with the ASEAN trade deal highlight that there is still an appetite for relatively open borders but markets are watching closely.

Looking ahead, it's critical to keep these themes in mind to filter out the signals from the noise. So long as these themes remain at the forefront, the trend of a lower US dollar, higher equities and higher commodities will continue.



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