Last week brought little or no movements on the financial markets. The VIX index, which measures volatility, dropped to levels not seen so far during the pandemic.
The lack of important economic data contributed to this environment. With a few exceptions, like the CPI or the inflation data in the United States, all other data was second- or third-tier. Effectively, it means that the focus was on the stock market’s price action. This week will likely be the same as it starts with a holiday (i.e., Presidents’ Day in the United States) and no important data until next Friday when the European PMIs are released.
Flows Keep Pouring into the Global Equity Markets
The equity markets in advanced economies follow the lead of the United States markets closely. The S&P500 and the Dow Jones keep climbing and making all-time highs, which puts a floor on any bearish price action on some other markets, like the European or the Asian ones.
The Australian dollar keeps its tight correlation with the stock market. Despite the Reserve Bank of Australia (RBA) sending dovish guidance at its last monetary policy meeting, the market participants like the fact that Australia and other countries in the Asia-Pacific have handled the pandemic better.
In sharp contrast, the dollar remains weak on the back of incredible fiscal and monetary stimulus from the United States. The market now expects that the total fiscal spending in the United States will reach $2.8 trillion this year – $900 billion from last December and another $1.9 trillion as of the new package that the Biden’s administration plans to unveil this month.
The extent of the fiscal stimulus is not matched anywhere in the world. In comparison, Europe remains well behind the U.S. – only $420 billion are expected to be injected into the European economies over the course of this year.
Because of the sharp difference in the fiscal and monetary responses from the United States and other countries, the dollar lost ground and continues to do so. If we add to this the fact that America currently vaccinates over two million people a day, the chances are that the economic recovery will happen faster and way ahead of other countries.
In fact, the International Monetary Fund (IMF) already updated its economic growth projections for the year, downgrading the Euro area and upgrading the U.S. All in all, stocks remain bid due to more money pouring into the financial system as never before. Because the interest rates throughout the world remain depressed, investors have no other alternative but to accept the inherent risks of investing in the stock market.
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