On Wednesday, trading on US stock markets went with an unprecedented high result. The Dow Jones index showed the largest one-day increase in history. In one trading session, the oil market won back almost 10% in the start of quotes for the week. The S&P 500 futures are in the highs reached on Wednesday, which may indicate attempts to continue growth in trading on Thursday.
It is completely unclear what caused such a sharp rise. One of the main reasons is the trick of President Trump, who expressed confidence in Finance Minister Steven Mnuchin and Fed Chairman Jerome Powell, and openly called for buying depreciating stocks in a strong economy. Trump actually repeated what Obama did in April 2009, which supported the market with his calls, but there is one significant difference between the current situation and the one that developed at the height of the crisis.
Obama called for the purchase of shares amid a sharp decline in interest rates and pumping markets with liquidity as part of a quantitative easing program and a fall in bond yields pushed investors into the stock market. Now, the situation looks exactly the opposite. The rates are rising while the Fed is reducing the balance. Meanwhile, the turnover of money, calculated as the ratio of nominal GDP to monetary aggregate M1, M2 or MZM, cannot find a basis.
Investors have to choose between supporting a falling stock market, which is in the stage of a bubble that has started to deflate and other tools that will show an increase in yields in the face of rising interest rates.
Trump's last argument about the strength of the economy is similar to the cry of a drowning man for help. The December data on business activity in the manufacturing sector shows an unprecedented sharp slowdown this month. Reports from the regional offices of the Fed do not give any chances to start a recovery wave. The New York Fed reported a slowdown from 23.3p to 10.9p in November. The PMI index in Philadelphia fell from 12.9p to 9.4p and the Kansas Federal Reserve Bank went into the negative zone, falling from 24p to -18p. Yesterday Richmond reported a fall from 14p. to -8p, simultaneously with a decrease in business activity as a slowdown in the labor market has been observed, that is, the manufacturing sector is currently entering a steep dive and will undoubtedly slacken other sectors as well.
Yield of 5-year bonds Tips continues to fall sharply, in December it fell from 1.76% to 1.52%, which suggests that the publication of data on December. Inflation in January will show a decrease below target of 2%, which will cause another wave of panic sales.
There are no macroeconomic reasons for turning the expectations of the US stock market. The rollback of the environment is just a strong correction after a long fall and a weekend and with high probability, the decline will be resumed on Thursday.
Eurozone
On Thursday morning, the ECB published another macroeconomic bulletin in which it acknowledged that the actual data turned out to be worse than expected.
At the same time, the ECB expects inflation to rise, which should compensate for the slowdown in global economic activity and support both the euro and business activity in the euro area.
On Friday there will be preliminary data on inflation for December in Germany, which will show how much the expectations of the ECB are based on a real basis. While investors prefer to consider the situation in the eurozone moderately stable, and the recent decrease in PMI to be temporary, such expectations support the euro in the face of the danger of a serious weakening of the dollar.
EUR/USD did not manage to organize the Christmas rally, however, there are not many reasons to wait for the negative dynamics either. The euro will most likely continue to trade in a wide range of 1.1260 and 1.1480 towards the upper limit of the range in the coming days because the forecasts for the January report on the US labor market are negative.
The material has been provided by InstaForex Company - www.instaforex.com