InvestMacro

Investors do not seem bothered by Washington’s political turmoil. Trump became the first US President to be impeached twice, a little more than a year since his first. While he will most likely continue to serve the remaining six days of his term, his political future is now uncertain with a high possibility that he is barred from running for the presidency again if he is found guilty of incitement of insurrection.

Global equity markets inched slightly higher on the (second) impeachment day with US stocks continuing to hover near their record highs. Political noise is apparently of the least concern to investors who are looking forward to strong economic growth in 2021 and another big stimulus package from the new US administration.

According to Biden aides, the President-elect is set to reveal his plans for a COVID-19 relief package later today, which is likely to be somewhere near $2 trillion. The package will include significant funding for vaccine distribution, an extension to eviction moratorium, support for the unemployed, government aid and another sizable direct payment to American families. The latter is likely to be the trickiest part as most Republicans and some Democrats are against going too big. On the other hand, opting for a small package will disappoint investors and lead to profit-taking in equity markets. Finding the right balance will not be easy.

While political instability in Washington has so far been ignored, there remains a risk of profit-taking if violence on inauguration day escalates, especially as markets are almost priced to perfection. With valuations extremely overstretched, some investors need an excuse to book their profits and 20 January may provide this.

Another risk investors need to keep an eye on is how high bond yields go from here. The good news is we are not yet seeing significant inflationary pressure reflecting in data. US consumer prices rose 0.4% in December and when excluding volatile food and energy components, prices only rose 0.1%. Overall, rising inflation will be one of the hottest topics in 2021, but it’s too early for the Fed to announce any tapering of asset purchases. Any signs of this may bring an end to the Dollar’s decline as higher yields begin to attract Dollar inflows and make equities valuations harder to justify. This will be a topic to explore in detail later in the year. However, it will be interesting if the Fed’s Chair Jerome Powell provides any hints on this topic later today on a webinar hosted by Princeton University.

President Donald Trump has been impeached by the House in the aftermath of last week’s riots on Capitol Hill. Trump now has the unenviable mark of being the only US President to be impeached twice, occurring just days before he is to hand over the reins of the White House to President-elect Joe Biden on 20 January.

Yet markets cared little for the political drama, as US stocks continue to struggle for meaningful direction.

Here’s how US benchmark indices fared on Wednesday, with tech counters leading the pack:

• S&P 500: +0.23%
• Dow Jones index: -0.03%
• Nasdaq 100: +0.63%

At the time of writing, S&P 500 futures can only inch higher, although it continues flirting with overbought territory (14-day relative strength index nearing the 70 mark).

However, US equities may receive a double boost on Thursday!

Biden to unveil stimulus plan details

The incoming US President has been teasing global investors about the “trillions” that could be poured into the US economy to help it overcome the pandemic. Such measures are set to be announced later today, which may include US$ 2000 stimulus checks for American households. A stubbornly high weekly jobless claims print, also due on Thursday, could underscore the need for more fiscal stimulus.

Stock markets had clearly reveled at the thought of more incoming US fiscal stimulus, especially in light of Democrats enjoying significantly less political resistance after winning both Georgia Senate runoffs. The S&P 500’s current record high was registered on 8 January, the same week those polls concluded.

Should markets like what they hear, then the reflation trade may resume across asset classes, potentially recharging the rotation play in equities while sending Gold higher as investors resort to assets that may help them outpace stimulus-fueled inflationary pressures.

Fed Chair to settle tapering debate?

Fed Chair Jerome Powell also has the opportunity to lay down a solid marker in the tapering debate that has engulfed markets his past week. Given the forward-looking nature, markets have been trying to pre-empt when the Federal Reserve might ease up on their bond-buying programme. Markets thought it could even happen sometime this year, in anticipation of a US economic outperformance that’s been aided by the trillions in both fiscal and monetary policy support.

The shift in narrative sent Treasury yields spiking, Gold prices stumbling, and the Dollar rebounding.

Fed officials have recently sent mixed signals about when they might unwind some of their policy support, although the latest commentary by Fed Governor Lael Brainard appears to pour cold water on the idea.

A more definitive statement by the Fed Chair himself could cause major moves across asset classes.

Should Powell shut the door tight on the very notion of tapering in 2021, that could see Treasury yields unwinding more of their gains, dragging the Greenback back down with it, while helping restore Bullion to recent highs.