Marius Paun | London, UK | Senior dealer | Friday, 29th January 2021
After reaching a fresh all-time high on Tuesday, S&P 500 moved lower, giving up more than 3% from the highs, as investors decided to take some profits off the table. The uneasiness was sparked by disappointment that the US Congress might not approve any stimulus package until mid-March at a time when Covid-19 cases are still rising. Although the consensus pointed to a February decision, The Senate pushed the timeline further.
The newly appointed US President Joe Biden also moved quickly on the oil and gas industry with a freeze on new leases on federal lands. He also announced that federal agencies will eliminate fossil fuel subsidies in due course. The executive order raised concerns about the impact of those new policies on existing energy sector jobs. Even if the greener economy will create new jobs in renewables, a short-term displacement is probably unavoidable.
On top of that, it seems the COVID-19 vaccine rollouts globally have run into trouble, due to supply and logistics issues. A case in point is the row between the European Union and drug-maker AstraZeneca over production delays, hence insufficient supplies available for delivery. All those concerns pushed investors into the US dollar especially when the much talked about $1.9 trillion fiscal spendings could not be as large as initially proposed. But are those worries likely to last?
We had the FOMC meeting earlier this week where the Fed left its benchmark interest rate unchanged as was widely expected. During the press conference, Chair Jerome Powell said that there is no plan to stop the bond-buying program and the interest rates will likely stay near zero for the foreseeable future. The Fed remains committed to make sure the economy recovers, doing everything they can to offer support.
Despite the potential delays in the fiscal stimulus, in the end, it’s hard to believe it will not come. Biden’s victory implies a certain level of stability in US politics will probably return. No more government by Twitter. He looks keen to address the pandemic properly, already mandated mask-wearing and social distancing in all federal buildings. He promised to get 100 million vaccines done in his first 100 days.
On his inauguration day, S&P 500 hit a new record high with other indices also reaching tops. Apparently, it has been the best day for stock markets since Ronald Reagan’s inauguration 36 years ago. His fiscal package is geared towards households this time as opposed to measures taken after the 2008 financial crisis which mainly helped banks. Americans are due to receive checks for $1,400 on top of an extra $400 a week from the federal government to supplement state unemployment benefits.
Biden’s new Treasury Secretary Janet Yellen (former Fed Chair) told the Senate Finance Committee “right now with interest rates at historic lows the smartest thing we can do is act big”. Supportive enough? Furthermore, we should consider the subject of debt forgiveness. Biden extended the student loan repayment pause until October. It’s easy to see why many ponder the possibility of seeing a spend, spend, spend, round after round of fiscal stimulus in the near future.
So does this lead to the likelihood of returning inflation? Ever since the 2008 financial crisis, many analysts said the QE will eventually spur inflation. The voices were particularly loud on mass media during the beginning of the year. So far it has not happened. So much so that it has become a bit like the boy who cried wolf. Nonetheless, the US households have plenty of cash piles (All those private investors taking the hedge funds on Robinhood platform regarding GameStop, an obscure gaming retailer?)
The US savings rate is above normal at nearly 13%. Once vaccines start doing their work on a large scale, companies will undoubtedly start rebuilding inventories and people start spending. What is the Fed more likely do at that point, let the interest rates or inflation rise?
The chart shows the bulls are steady in control with yet another all-time high at 3870 reached on January 26th. Due to the Wednesday sell-off, the moving averages started to point lower with the price now below both indicators. The immediate term outlook points south.
On the way down the next support is just above 3710 marks. A successful cross below that will bring into focus solid resistance turned support at 3660 and 3590. On the way up bulls need a close above 3785 if the rebound is to have any chance. If they succeed in pushing higher, a more serious resistance can be seen around the 3820 handles.