Marketseuphoria,FOMCandsecondwave

The final election results have still not been called. The votes counting is still on in multiple states and in some cases the race is so close that even the absentee ballots by military personnel’s which were considered as rounding errors in previous elections might decide the final winner. In an all or nothing kind of electoral college system, a surprise in the end can change the equation. But markets have already moved on and the euphoria indicates that they don’t see the possibility of a last-minute surprise. The Senate and HOR are expected to remain in the Republican and Democrat fold respectively. So, the scenario which is most likely is a Democrat President with a Republican Senate. What this means is that not every policy which the new President thinks of will sail quickly. It is though possible that with the new incumbent in the WH the relations between two sides become less acrimonious.

Yesterday we also had the FOMC November meeting decision. The Fed kept monetary policy on hold and maintained that its asset purchase programs will continue at the current levels. Fed Chief Jerome Powell noted that the economic recovery has exceeded their base line expectations. The Fed statement was in line with the market expectation, the rates are going to remain low for long which was already priced in September when the Fed came with an average inflation targeting framework. That essentially meant that they would keep the rates low even if inflation overshoots the 2% target just to compensate the low inflation period.

If we see the market reaction to the election results or FOMC, equity markets especially are rejoicing. Dow Jones was up another 540 points or 1.95% yesterday. DAX was also up close to 2%. Nikkei is up 1% in the morning trade today. The dollar Index touched a 2-month low of 92.47 and is currently trading at 92.70. The dollar retreat was visible in Euro and Pound levels as well as many EM currencies. One notable beneficiary has been the South African Rand which is a currency which we track closely that has appreciated by close to 4% since Wednesday when the counting started in the US. The US 10-year yield is trading at 0.77 having seen a top of 0.72 yesterday. Gold is trading at 1940$/oz which is a 6-week high. The usual explanations of risk off, safe haven demand can’t explain the move in gold.

The news on the corona virus front is that the US registered a daily case record of more than 120k new infections was largely ignored by the markets which looks like a case of selective amnesia. The situation in Europe is also not encouraging. Italy registered close to 35k new cases on Thursday. It is important to note that the European nation has been witnessing a daily case count of more than 20k per day since mid-October in a clear case of an ominous second wave. Will the new lockdowns again cripple the economy and lead to demands for even greater PEPP funds, we don’t know yet. But one thing we know that a quick V shaped recovery is now off the table. 100 years back the Spanish flu also had a more lethal second wave but at that time there were no central banks to cure it, this time they are there.