Markets react the Powell’s speech and Biden’s relief package

Markets Underwhelmed

Financial markets are still reacting to Federal Reserve Chair Jerome Powell’s scheduled speech on Thursday and the details of incoming US President Joe Biden’s Covid-19 relief bill this morning.

The US dollar and bonds started to sell-off after Chair Powell effectively took QE tapering off-the-table, as he noted that the US economy is “still far from our goals”. Powell’s comment was seen as a way of lessoning markets expectations after days of rising US bond yields and strength in the greenback.

Following Chair Powell’s speech, the bond market sold off broadly, with 2-year all-the-way down to 30-year Treasuries selling-off. The EURUSD also briefly bounced, while the USDJPY fell to a fresh weekly low.

Markets also appear underwhelmed by the details of Joe Biden’s proposed $1.9 trillion COVID019 relief bill. Biden noted that the bill would have to be paid back, which was unexpected, while investment bank Goldman Sachs have said that some parts of the bill will be hard to pass through US congress.

Perhaps it is also a case of buy the rumour and sell the fact. US and global stocks have not reacted positively to Biden’s bill. The S&P 500 and Dow Jones Industrial Average futures are down, while the Nikkei 225 is down by over (-0.6%) today.

It should be said that US dollar has started to firm again this morning, while gold and silver are back under pressure. European stock markets are set to open lower as attention turns back to Italy.

Yesterday, the spread between Italian and German bonds widened the most in over six months. This will be the key dynamic that markets will be focused on during the European trading session.

If the bond spread continues to widen, we should expect the euro currency to remain under pressure, and weakness should start to creep back into the ITA40 index and Italian stocks into the weekend.

COVID-19 infections in China continue to rise once again. China has issued a statement saying that the country has seen the most COVID-19 infections in over ten months. Traders may be hesitant to hold riskier asset in case infections continue to spiral over the weekend.

The Chinese government has sealed-off two major cities to avoid contagion and urged its citizens not to travel over the Chinese New Year Holiday period. The Shanghai Composite continues to look past the rising infections and closed higher by around (+0.25%) on the day.

US retail sales are going to be the big focus during the US trading session, especially after FED Chair Powell’s speech and yesterday’s soft weekly jobless claims figures from the US economy, which moved close to 1 million mark.

Market expectations are for retail sales to have declined for a third straight month in the United States last month. Spending in bars and restaurants are expected to have plunged due to COVID-19 restrictions, while auto and gasoline components of the report are predicted to have rose.

It is difficult to know how the market will react, but I suspect that traders could move into the US dollar and sell stocks if retail sales come in worse-than-expected. Market sentiment is quite fragile today due to the risks hanging over the market, such as political uncertainty and rising COVID-19 infections globally.