The dollar as a whole remains weak ahead of the start of the American session. But as risk appetite cools slightly, buyers are turning their attention to the Swiss franc and the yen. In the end, the dollar fell sharply as US stocks surged to new all-time highs in reflationary trading and vaccine optimism. Selling is indeed broad this time around as the dollar fell even against the yen and the Swiss franc.
Given the weak economic calendar this week, a further drop in the dollar can be expected in the near term. US stock markets rallied to record highs, fueled by market expectations for more generous financial stimulus, close to Biden’s $1.9 trillion promise, and hope seems high.
At the same time, vaccine introduction appears to be advancing at a rapid pace, which creates some hopes for a faster return to normalcy and support for US economic recovery. In terms of US fundamentals, we expect the second impeachment trial of former President Trump, due to begin today in the US Senate, to make headlines but may have little impact on the markets.
The political implications of the trial seem to come down to whether Trump will be allowed or not to run again in the future, but Democrats seem to lack the Senate votes needed to pass a conviction. Given the paucity of financial statements in the US, we can see that fundamentals will take the lead and shape today’s sentiment.
It was another strong performance on Wall Street as the US stock exchanges were driven by active global risk sentiment. A sense of economic optimism oozes from every corner of the market.
On Monday, the yield on 10-year US bonds rose above 2.20% for the first time since 2014, the yield on 10-year bonds at one point rose above 1.20%, and the yield on 30-year bonds briefly exceeded 2.0%. As long as this is the type of inflation that promotes long-term economic growth rather than damaging it, inflation itself can push stock prices higher.
After all, stock prices are the (theoretically) discounted sum of all future cash flows, a nominal number; if inflation rises, companies raise prices accordingly, which translates into higher earnings and therefore higher stock prices (although the purchasing power of the monetary value of the stock will not change).
Elsewhere, the earnings season has gone much better than expected and this is another tailwind for stocks; To date, 294 S&P 500 companies have posted earnings, and 83% of companies have beaten analysts’ consensus estimates. Analysts now expect S&P 500 companies to post 2.4% y/y profit growth in Q4 2020. In early January, stock market analysts expected S&P 500 companies to report lower Q4 2020 profits by more than than 10%. Big business has adapted to the quarantine and the virus much better than expected.
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