16th December 2020 – Persisting Risk-on sentiment, before the FOMC’s outcome

Walid Salah Eldin

Active member
The US major equities indexes are still close to their all-time highs and the oil prices are boosted by higher hopes for faster growth to come next year following the positive vaccination news and the new governmental relief which is looking now nearer than ever.

S&P 500 is trading now close but below 3700 level and NAS 100 is above 12600, While the gold started to creep up again to be traded currently above but close to $1850, As the markets are waiting today by God’s will, for an action or at least stronger guidance to a close by new action by the Fed to support the economy further.

After losing momentum signs in the recent weeks because of the Corona virus wider than expected spreading, most of the market’s participants started to price in new Fed’s stimulus measurements to come to face the current coronavirus resurgence.

The recent testimony of the Fed’s chief Jerome Powell before the congress economic committee highlighted the need for that help prop up the economic expansion and halt the uncertainty growth.

On the 5th of last November, The FOMC members decided to keep as expected its fund rate unchanged within 0-0.25% range.

Following their meeting, Jerome Powell said we were analyzing the Fed's assets purchases program influences and the possible of shifting to longer duration and wider holding of assets, if needed.

He said also that the fiscal response was very good and it is still absolutely essential currently.

He indicated also that there is still a need for strong healthcare policy amid rising concerns about COVID-19 widespread which may cause pullback in the labor market which has shown later materialized weakness signs by add fewer than expected number of jobs out of the farming sector in November, as the median forecast was referring to gaining 470k and the US labor report has shown only 245k.

The Fed has actually guided the markets to lower interest rate outlook by its intimating of letting the inflation to fly higher than its normal 2% yearly target it adopts over the medium term to support the economy and labor market which can get ready for higher inflationary wage pressure, without intervening from the Fed by raising rates.

In response to the crisis, the Fed has already managed last March to widen also its balance sheet initially by USD2.3tr before driving it to surpass in May USD7tr level to reach its highest level ever by reaching to USD7.242tr in the beginning week of this month to the support the small businesses and weigh down on the cost of the borrowing for supporting the economy and for the US government which is in need for lower UST yields to be paid, after it could pass $2 trillion CARES Act until now driving the annual deficit for FY2020 to unprecedented level reaching $3.1 trillion.

While the hopes are still rising for new U.S. financial stimulus packages, following the US presidential elections, despite the current debt levels near USD27.44tr, and US Debt to GDP ratio which reached new all times high in April 2020 recording 122% hurting the creditability of US which is still struggling to have faster growth rates.

The US economy has already got boosts by several reflation plans valued more than USD1.5tr, before the virus crisis during Trump's era which watched also threats to the global economy because of his trade wars which drove the Fed to lower the Fed fund rate three times by 0.25% in the period from Jul. 31 to Oct. 31, 2019.

While The markets are still looking forward for a substantial relief packages to revive the household sector and underpin the government spending and in the same time betting on easier Sino-American trade tensions under the new US President-elect Joe Biden's leadership which may end the US trade wars too.

In Brief, The Fed's easing policy can be extended to considerable period of time and it has the ability to do on contrary with other less-flexible central banks which face difficulties at the current historical low rates. By a way or another, it can twist again its current holding of governmental debt into longer period debt and it can increase its purchasing and widen its balance sheet further.

While the financial policy in US is expected to give further support to boost the economic expansion momentum in the wake of Corona by more reflation plans. So, it looks that we are ahead of further floods of cheaper money supply to boost the economy, the demand for energy and raise the prices of assets, equities, Gold and the digital currencies as well by God's will next year.

Happy New Year

Kind Regards

Global Market Strategist of FX-Recommends

Walid Salah El Din
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