A new week has come, and we must admit that the "contrarian" New Year rally, despite the storm of decisions by central banks last week, did not occur. Last Friday's pessimism seeped into investor sentiment, European markets and US futures slumped on Monday.
Investors were upset by the news that a large spending package in the United States, the so-called Build Back Better, may not be approved (its approval has hitherto been taken for granted), as Democrat Senator Manchin unexpectedly objected, saying that he could vote against it.
The politician's stance really should be taken seriously. Goldman Sachs) removed the fiscal stimulus from its baseline scenario, and also lowered its forecast for US economic growth in the first quarter from 3% to 2% in the first quarter, from 3.5% to 3.0% in the second quarter, and from 3.0% up to 2.75% in the third quarter.
Along with the sell-off of risk assets, the yield of Treasuries, both near and long term, continues to slide at a moderate pace. It is noteworthy that the US dollar was growing on Friday amid the correction of equities, and today it is declining along with them, especially losing ground against the euro.
At the same time, EM holds well against the dollar, USD/RUB does not yield to risk-off trading near the opening. This all looks very much like investor bets are dropping on the Fed starting to raise rates shortly after the end of the QE, and this is likely because the FOMC was considering that fiscal policy would pick up the stimulus baton in the form of the spending as mentioned earlier package when monetary incentives begin to recede into the background gradually.
A situation is potentially emerging where this will not happen, which implies a risk for the forecast of monetary tightening. In other words, the market may perceive now that the failure to approve the spending package will force the Fed to postpone the rate hike.
Goldman adheres to the same position, already doubting its previous forecast that the first increase in the federal funds rate will occur in March 2022. Against this background, currencies, where central banks are actively trying to suppress inflation by tightening policy, look attractive.
In addition to the increased attention to the prospects for fiscal stimulus in the US, this week it is worth taking a closer look at such reports as consumer confidence in Germany from GfK, consumer confidence from Michigan, as well as profits from Chinese industrial enterprises.
By the way, speaking of the Chinese economy, the story is gaining momentum that in the cycle of tightening-easing regulation, increasing-decreasing leverage in the economy by the Chinese government, a favorable phase is beginning, as forecasts for the growth of the Chinese economy are declining (only 3.3% YoY this quarter) as well as the growing risks of external demand, which to a significant extent influences economic activity of China.
A few weeks ago, instructions were issued to the banking sector to increase lending to small and medium-sized enterprises, companies engaged in the renewable energy sector, and developers and to improve the issuance of mortgages.
In addition, PBOC recently lowered the reserve ratio for banks (the main policy instrument of the Central Bank). With the increase in the number of stimulus measures, investors expect the stimulating effect to seep into external markets. In addition, this should stimulate the demand for risk locally, including for securities of distressed developers.