Retail mania bubble pops, stocks rally, dollar rallies

Trading mania subsides

Trading is back to normal.  Risk appetite returns as the retail trading mania ends, the US turns a key corner in the fight against COVID, and as Democrats inch closer towards a fresh COVID relief bill.  The Reddit army is retreating as some retail traders are scrambling to the sidelines.  It was fun to watch, but the retail panic is getting ugly on social media.  Some traders are trying to hold the line, but I think we’ve all seen how this movie ends.

A good part of today’s rally comes from the news that US COVID new cases and hospitalizations are heading in the right direction and vaccinations have eclipsed the total number of coronavirus cases.

We are still in the early rounds of stimulus discussions, but it seems certain Democrats will end up doing this deal all by themselves.  While everyone agrees something needs to be done to improve the “war on inequality”, a minimum wage increase at this point in the economic recovery could end up hurting the small guy.  Small businesses may have to thank Senator Manchin for his opposition for the minimum-wage hike.  In the end, the economy will see at least a trillion dollars in stimulus via the budget reconciliation.

The Nasdaq is slightly lagging behind the S&P 500 index and Dow Jones Industrial Average as investors are skeptical Amazon and Alphabet earnings after the close will impress enough.  Big tech already climbed higher after Microsoft and Apple earnings, so it will take a huge beat and strong outlook.  Amazon will have trouble matching last year’s record thanks to COVID.  Alphabet will reveal their cloud revenue and if Wall Street ends up preferring Microsoft, that could trigger some disappointment for the stock.

FX

It seems the FX world is fixated on economic growth and right now the US economy is looking much better than the euro zone. The dollar is in the middle of a major move against the euro and it seems like momentum could easily take the currency pair towards the 1.17 region.

At the end of last year, the bearish bets were extreme against the dollar, so it shouldn’t surprise anyone that the dollar is mustering a comeback here.  The dollar’s longer-term outlook is for significant weakness as the Biden administration is showing a return to conventional governance and as the Fed will continue to print money as Congress nears another COVID relief bill.

The euro-dollar trade could reset after one last major push lower.  Once Europe gets their vaccine strategy in order, that could be the catalyst that ends this dollar rebound.

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