- Equity markets stage a late comeback after Biden boosts semiconductors
- Euro/dollar caught between conflicting narratives, currencies quiet overall
- Most of Asia off for Lunar New Year week – thin liquidity implies risks
Equities were almost headed for a red session yesterday before news broke that the Biden administration will try to alleviate the shortage in chips, lighting a fire under semiconductor stocks that ultimately saw the whole market close higher. Soaring consumer demand for electronics during the pandemic coupled with supply limitations has given rise to a global scarcity of chips that has plagued multiple industries, putting executive action on the table.
The S&P 500 closed almost 0.2% higher, refusing to retreat from its record peaks even as the overall ‘risk party’ appeared to be running out of juice. The same old stimulus and vaccination stories appear well priced in by now, and investors seem to be searching for the next big theme that will drive sentiment. Wall Street futures are slightly negative on Friday, perhaps as traders trim their risk exposure ahead of a long US weekend and take some profits.
Staying in US politics, President Biden apparently warned senators from both parties yesterday that unless America steps up its investment game, China will “eat our lunch”. Admittedly, this might be an ingenious move by Biden to lay the foundations for the second infrastructure investment bill he promised.
The Democrats are already using the budget reconciliation process for this relief package, which allows them to push the bill through Congress without any Republican support. They probably cannot use this process again this year, so they will need several Republican senators on board to pass the second investment package. Appealing to their patriotism and national security interests may be the only realistic way to secure that support.
All quiet on the FX front, but penny stocks party
It has been a very quiet week in the FX theater. A lack of fresh drivers has kept currency volatility to a minimum, and some traders may be absorbed by the raging mania in equities, especially in small cap and penny stocks that are showing real signs of ‘irrational exuberance’.
Euro/dollar is on the retreat on Friday after meeting resistance near its 50-day moving average but is set to close the week higher overall. The pair seems caught between conflicting narratives. Everyone agrees the European economy is in dire straits and behind in vaccinations, but there’s a fiery debate about the dollar side of the equation.
Some think the supermassive spending packages from Congress will turbocharge the US economy, enabling the Fed to normalize rates sooner than everyone else, which ultimately boosts the dollar. Others believe the dollar will be a victim of its own stimulus success. If the economy fires up and riskier assets perform well, the reserve currency could crumble as safe-haven plays are decimated.
The truth may be somewhere in the middle. The greenback could stay under some pressure for now, while the US economy is still in trouble and the Fed refuses to entertain the idea of QE tapering. In the coming quarters though, once all the federal spending flows in and the economy fires up, the dollar could realign with US fundamentals. The reserve currency won’t behave like a safe-haven forever.
Pound ignores GDP data, mind the liquidity gap
Elsewhere, the British pound is on the back foot today, despite a stronger-than-expected batch of GDP data for Q4. A mild tone of risk aversion has also grabbed a hold of the commodity currencies.
The only highlight today will be a speech at 15:00 GMT by the Fed’s ‘third in command’, John Williams.
Beyond that, liquidity will be in short supply in the coming days. American desks will be away for a holiday on Monday, while China and most other major Asian hubs are closed through Wednesday for the Lunar New Year. This raises the risk of sharp moves without much news behind them, or even outright flash crashes if any real news hit in a thin liquidity environment.
