HopeofvaccineandECB'sDilemma

The Dow Jones was up 2.2% in yesterday’s trading. The Dollar Index is at 99.6. Dow Jones futures are in green. Oil has jumped up, Nymex trades at 17$/ bbl and brent at 24 $/bbl for the near month delivery. The Indian rupee is knocking at the door of 75 on the upside. Indian equities are up, Nifty is trading up by close to 3% in the morning trade.

Yesterday we had closed our note saying that one should not read too much into the false dichotomy of “risk on” and “risk off” as these are most probably post facto causal attributions. But seeing as the most parameters around the world are pointing towards an improved risk sentiment, we have to resort to the statement that “risk on” trade is on, howsoever vacuous that may sound.

The rays of hope come from three different directions. First of all, FOMC in its policy review said yesterday that they will continue to support for a long time until the full employment levels return. This is just one more version of Central Bank’s “whatever it takes” war cry. Second was the news of the declining pace of new infection cases and a possibility of a reopening even in limited form. The third and most important one was news around positive results of a potential drug cure.

The US government top disease expert, Dr Anthony Fauci, said that the results of a clinical trial offered “quite good news”  and were “highly significant”.  The drug maker’s share price jumped by close to 8% post the statement. Dr Fauci, though, added that after all the analysis he remains “cautiously optimistic” about the potential treatment. “Cautious optimism” is kind of a phrase which covers the entire spectrum of possibilities of good, bad and everything in between. Markets for now have latched onto the optimistic part of the phrase, throwing caution to the winds.

Today we will have the ECB meeting outcome where the market will be interested in knowing whether ECB Chief Christine Lagard adds to the  750 bn Euro bond program announced last month. The general expectation is that there might be no fresh announcements today but ECB might give future guidance that they are ready with more. The very fact that there has been no consensus on the continent-wide fiscal response to the pandemic crisis will also deter Central Bank from moving too fast too soon. Contrast this with the kind of fiscal and monetary responses which countries like the US and UK have rolled out, given that they are not too constrained by the legalities of providing stimulus.

In his book, The Euro : How a common currency threatens the future of Europe, the nobel prize winning author Joseph Stiglitz writes in detail about the internal contradictions which make the euro block. He writes that individual countries have divested their rights of independent monetary policy and currency management to ECB and hence are left powerless on the fiscal front when the crisis strikes. In absence of a currency union, an individual country can decide to devalue its currency , boosting exports to weather the crisis.

Coming back to the ECB meeting today, we expect that in the case that the ECB shows cautiousness in adding more stimulus, it might result in a short term appreciation in the Euro. The Euro currently trades at 1.0850.