With Trump close to being ousted, equities catch their breath – Market Overview

With Trump close to being ousted, equities catch their breath – Market Overview

The US equities take a breather after weeks of uncertainty and chaos.

The confirmation of the Democratic seizure of power after so much political tension in the post-electoral period, and above all, the Democratic dominance in Congress, both in the House of Representatives and in the Senate, is beginning to affect the market due to the high possibility of implementing fiscal stimulus measures larger than those originally envisaged.

President-elect Biden has already commented that he will propose multi-trillion-dollar tax relief packages with a Democratic-dominated Congress more easily approved.

The immediate result in the market has been the rise in interest rates on US Treasury bonds.

US inflation-linked bonds have experienced an increase in yields of more than ten bps, and the Tnote- 10-year US Treasury bond far exceeds the level of 1%. Currently, 1.10%, well above the minimum, reached after the Fed's interest rate cut when it was trading at 0.50%.

Firstly, this extraordinary rebound is due to the increase in the Government's financing needs that would occur if these enormous promised fiscal stimulus measures are implemented and, secondly, to the fact that inflation expectations would increase in a scenario of greater availability of liquidity for consumption.

The Greenback

In principle, these measures would serve as support to the stock markets, although today they begin with slight downward corrections, where their effect has been most noticeable is in the price of the US Dollar.

Until less than a week ago and since March, the Dollar has been experiencing a downward trend after the Fed cut interest rates to historical lows, but this rebound in Treasury bond yields, if maintained, could suppose a brake on the weakness of the Dollar, and there are already analysts who speak of a possible change in trend.

The correlation of the Dollar with long-term interest rates is positive and high.

One of the most sensitive pairs to interest rates, the USD/JPY. The pair has managed to break through intermediate resistance levels between 103.90 and 104.00 and is heading towards a vital resistance zone located at 104.73, whose breakthrough would end the last bearish leg that began in March.

In this case, an additional element must be highlighted: the declaration of Japanese government officials to maintain the stability of its currency and expressly defend that the price against the Dollar does not exceed the 100 zone, something that in principle stopped the decline in the pair.

This rally in the Dollar is also being noticed in the EUR/USD price. The pair has corrected the support zone of 1.2160, where it is currently, and below it makes its way towards the range between 1.2000 and 1.2050, which is the central support zone below which the last uptrend started in early November is broken.

Sources: Forexlive.com, Bloomberg.

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