Markets Mixed, Buck Up on Economic Hope

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Markets Mixed, Buck Up on Economic Hope

JANUARY 13, 2021

The U.S. Dollar is strengthening after mixed overnight markets operating with some level of cautious optimism as the globe remains tied up because of COVID-19. 

Overview

Although oil prices continue to go up, some experts are arguing that a return to travel globally will not take place until deep into the third quarter of the year, thus bringing down some of the demand expectation the markets are pricing-in.

Additionally, central bankers seem to all agree on one thing: the global economic recovery will require more financial aid, particularly direct spending to counteract the drag in labor and consumption. This sentiment was declared in a Q&A by European Central Bank President Christine Lagarde and St. Louis Fed President James Bullard. Even the World Bank is warning that a fast recovery is not in the works and much more cooperation will be needed among nations.

In regard to inflation, December Consumer Price Index figures fell in line with expectations by expanding 0.4% for the month. Recent concern with the yield curve has some worried that strong inflationary growth is coming and that the Fed along with Treasury will need to act to control the yield curve. Nevertheless, it seems yields are up on high expectations of economic reflation and aggressive spending from a new administration with congressional support to pass a large expenditures bill. Bullard said the Fed is on a wait-and-see approach, but no one should think 2.0% inflation down the line will trigger a taper tantrum by the Fed that could create economic havoc. 2021 may prove to be calmer as we just wait.


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EUR  

The Euro seems to be dealing with some unfortunately familiar struggles as it started dwindling down based on central bank commentary and the potential for political struggles in the periphery nations. As central bank officials look for ways to calm markets and aid further in the battle against the pandemic and its effects, Italy is once more seeing the reason for worry. Prime Minister Giuseppe Conte has been able to legislate with an alliance that brought in the “Italy Alive” party under the leadership of former PM Matteo Renzi.

For the last year or so, the alliance has tried to stay together, but disagreements over budget and other items related to power may trigger “Italy Alive” to pull ministers from the administration, thus leaving Conte with the need to rebuild a government. In the midst of vaccines and high infections, this could play out to be a disaster because it would be rough to have elections.

GBP  

Pound Sterling managed to sustain its gains as markets welcomed commentary from Bank of England’s head Andrew Bailey. Major banks had priced-in bets that the BOE would dip into negative interest rate territory as soon as August, but Bailey’s statements on seeing issues with the implementation of sub-zero rates managed to take this talk off markets for now. As Pound tries to stay buoyant, we shall monitor real economic factors as the U.K. copes with new trade guidelines and the negative outlook over a last-minute trading deal.

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