Euphoria,whateverittakesandJeromePowell

We are writing the update after a break of four days and are not exactly surprised to find that nothing much has changed around the world in this period. The oft repeated analogy about the tussle between Yin and Yang representing the hope and despair in markets is still relevant. The US Dow index is hovering around its life-time highs. The euphoria induced by two positive developments on the vaccine front gets tempered when the news of fresh corona cases is read.

Since November 4, every day the cases have been above 100k per day with the last few days the daily number crossing 150k consistently. However, it is important that the number is studied a bit in detail. The highest number of daily cases previously was seen in mid-July when the figure of more than 50k per day was perceived as alarming. One way to look at the numbers will be to see how the hospitalisation number is rising. In case the number of people getting hospitalised has also become 3 times, then it really signals something ominous. Otherwise the rise can be attributed either to an increased number of testing or improved test mechanics which is capturing previously uncaptured cases. Factors like change in weather can also play their role.

On the hospitalisation front in the US, the number has increased but is nowhere close to a 3 times increase in new cases. Markets being the great aggregator, are discounting these fine details and reasonably finding a reason to be euphoric.

The other news items which we track closely like transition of power in the US, second stimulus relief bill and Brexit talks, here we also find that the state is same as last week. In the US, President Trump declared on Twitter on Monday “I won the election”. As news about the result of the legal battles trickles in, it is highly unlikely that any surprise will emerge on this counter. On the corona virus relief bill, the president-elect has called for the quick and bipartisan decision. As the Senate is still controlled by the republicans, it looks unlikely that a compromise will emerge quickly.

US Fed Chief Jerome Powell while speaking at a seminar yesterday said that “Fed is committed to use all its tools to support the recovery for as long as it takes until the job is well and truly done.” These are heavy words. In 2012, when the Eurozone was battling a debt crisis, ECB Chief Mario Draghi had made a statement which was considered historic. He said “within our mandate, ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough.” The speech was later called the “whatever it takes” speech. The words helped the Euro recover. But unlike 2012 currently no one is betting against the US Dollar and US bonds currently. Draghi’s speech was more to dissuade the speculators from speculating the demise of the Euro. Today though the Fed statements like this risk fanning unbridled optimism and unrealistic rallies. Readers would do well to ask what is real and unreal anyways?

On the domestic front, the systemic liquidity is rising every day. Yesterday 5.7 lac crore was placed in Rev repo window. With rev repo rate standing at 3.35% this calculates to a daily cost to RBI of around 52 Cr INR. Keeping liquidity in ample supply is important to keep the rates in check. INR starts its day at 74.46, 10 year benchmark bond at 5.87.