Yellen stimulates markets

Yellen says more stimulus on its way

Wall Street got back to business as usual overnight, buying equities and selling the US dollar as Janet Yellen, in her Treasury Secretary selection testimony, told them everything they wanted to hear. They wanted to hear more stimulus, and Ms Yellen delivered 1.9 trillion reasons on that front. As is financial markets wont, however, they ignored what didn’t fit that narrative. Namely, taxes would rise on corporations and the rich, and that a rapprochement in relations with China was off the table. Ms Yellen mentioned China’s trade practices and the incoming Biden administration has signalled that the China tariffs will remain untouched.

Asian equity markets seemed to have taken the China position rather more seriously. After a rocky start, Asian equities are creeping into the green this morning, but the rally has more of a circumspect pragmatic look to it. Part of that will, of course, be due to the uncertainty surrounding the US presidential inauguration this evening. I suspect that increased security across the country will nullify that risk.

China left its one and five-year Loan Prime Rates unchanged today as expected. At this stage, I do not see the PBOC looking to materially tighten monetary policy until late in 2021. With a creeping series of lockdowns in parts of Beijing and its surrounding provinces as Covid-19 cases stubbornly appear, the PBOC is likely to be more concerned right now with slowdowns and not excess leverage.

Bank Negara Malaysia will announce its latest rate decision today, and with most of the country now likely to be under movement control orders, I expect them to cut by 25 basis points to 1.50%. Through luck or design, Malaysia has found itself with monetary ammunition to deploy to support the domestic economy, which will take an inevitable hit because of the nationwide restrictions. That may lead to some weakness in the ringgit but should be supportive of local equities.

The Bank of Japan and Bank Indonesia also announce rate decisions tomorrow. Speculation continues that the BOJ will tinker with its quantitative easing programme and may explain the yen strength seen this week and the gloomy start to equity trading today. Frankly, I would be shocked if they did, if anything, with Covid-19 restrictions in force now, they would be looking for more ways to inject money into the domestic economy. By contrast, Bank Indonesia is likely to remain unchanged at 3.75%, especially with USD/IDR creeping back above 14,000.00.

The European Central Bank and the Bank of Canada also announce rate decisions over the next 24 hours. I expect no change from either, but the ECB may note the increasing risks to the European recovery due to the sweeping national lockdowns across the bloc. Neither decision should have much market impact.

Although we have a lot of data still due this week globally, notably Markit PMI’s on Friday, it is mostly second-tier and will have a low market impact. Markets will default to the US stimulus story and act accordingly with one eye on the presidential inauguration and the expected flurry of executive orders from the Biden administration, starting tomorrow.

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