Markets take a breather as they await further announcements from Joe Biden

Focus will turn to how quickly the new president's $1.9tn stimulus plan will pass in Congress

Foreign exchange and commodity markets have taken a bit of a breather in the lead up to President-elect Joe Biden’s inauguration, which takes places later today. In an already shortened trading week in observance of Martin Luther King Day, US stock indices have paused as they await further announcements from the new president.

Since January 8 to the time of writing, the Dow Jones Industrial Average has fallen 0.91 per cent, while the S&P500 and Nasdaq have shed 1.48 per cent and 1.54 per cent respectively.

Equity markets fell despite the announcement of Mr Biden’s new $1.9 trillion stimulus plan. Yet to be passed by Congress, the plan splits approximately $440 billion towards small businesses and another $415bn earmarked for science and research and development to fight the Covid-19 virus.

It is a rather unique time in US politics, with the first few weeks of Mr Biden's presidency expected to be overshadowed by Donald Trump's impeachment trial. Despite this, the focus will be on his ambitious stimulus plan and how quickly it will pass in Congress.

The US Dollar Index has gone through a positive buying spree during this time. After hitting lows of 89.20 on January 6, the greenback has gained more than 1.6 per cent in the past 10 trading sessions to move above the 90.50 level.

It is by no means a change in the trend for the US dollar, but more a result of profit-booking and risk-off moods as we enter a period of slight uncertainty. The greenback has suffered as a result of the record stimulus pumped into the economy in 2020 and fell more than 6.8 per cent last year.

I am expecting the US dollar to remain under pressure in the first two quarters of 2021 – and the moves we have seen in the past week are slight blips in the overall bearish trend for the greenback.

Earnings continue on Wall Street this week and I will be watching out for how the big banks continue to report, with Bank of America, Goldman Sachs and Bank of New York all yet to announce at the time of writing.

Quote
The greenback has suffered as a result of the record stimulus pumped into the economy in 2020 and fell more than 6.8 per cent last year

JP Morgan and Citigroup beat forecasts last week with respective earnings per share of 3.79 and 2.08 respectively. I am expecting similar bullish results from the banking sector this week. Also announcing is Netflix and Proctor & Gamble.

Looking ahead, we have a host of Purchasing Manager Index data from the US, eurozone and UK on Friday. A measure to gauge the activity levels in either the services and manufacturing industries, the PMI is a key metric and leading indicator of an economy’s overall performance.

The data is expected to show that German and eurozone manufacturing PMI will continue to show expansion, while services PMI will show a contraction. It’s a similar forecast for the UK and US, both of which are expected to show growth in manufacturing PMI.

The European Central Bank will also meet on Thursday for the first time in 2021. While we expect the central bank to keep its core monetary policy unchanged, ECB president Christine Lagarde may be pressured to announce an expansion to its current bond-buying programme amid a backdrop of further lockdowns and delayed inoculation drives.

After a rather astounding run from the end of October, a period in which the Dubai Gold & Commodities Exchange EUR/USD contract gained 5.8 per cent, the pair corrected 1.6 per cent in January to trade at the current 1.21 handle.

I am expecting the upsides to continue in EUR/USD and will keep that 1.23 level as my near-term target as what we have seen in January is a minor blip based on factors discussed earlier.

After a stellar December, DGCX’s gold contract came in for a bit of volatility during January and is down 3.4 per cent on the month. I am waiting for the channel between 1,780/1,800 before triggering long positions in the precious metal.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti

EDITOR'S PICKS
NEWSLETTERS