Stabilization of the American stock market is not a reason to sell the US dollar. The euphoria about the imminent opening of the economy brought stock indices too high. Gloomy realities will force speculators to take profits. The catalyst for this process could be the escalation of the trade conflict between Washington and Beijing. Following the pandemic and recession, geopolitics is a new blow to financial markets. This is a serious restraining factor for the recovery of the global economy, uncertainty does not subside, which means that the time has not yet come to reduce the share of safe haven assets in investment portfolios.
The most serious market movements occur at those moments when Fear gives way to Greed, and vice versa Euphoria is replaced by an awareness of gloomy realities. From the level of the March bottom, the S&P 500 grew by about 30%, and financial managers invested $ 1.1 trillion in money market funds, increasing their assets to record highs. However, a study by Societe Generale confirms that over the past 150 years, “bear” markets have recovered on average only 11% in the first three months after the collapse. Now everything is going much faster, which I personally associate with large-scale fiscal and monetary incentives and the hope of a V-shaped recovery of US GDP. The chances of the latter are melting before our eyes.
Dynamics of money market funds assets
According to JP Morgan, risky assets will fall by 10% if the White House decides to raise tariffs on Chinese imports, and this will only be the beginning of the end. Does Donald Trump need this? Yes, a scapegoat has been found, but the escalation of the trade conflict with the Celestial Empire will probably drop stock indices, which, according to the president, are a kind of mirror of the effectiveness of his activities as head of state.
On the other hand, the States need to patch up holes in the budget. A large-scale fiscal stimulus cost them dearly: the US Treasury plans to increase the volume of government bonds in the third quarter to $ 3 trillion, which is significantly higher than the previous record loan for the entire fiscal year in 2009 ($ 1.8 trillion). In 2019, it was about $ 1.28 trillion. To attract foreign buyers, a high demand for safe haven assets and a stable currency are needed. The persistence of uncertainty and the growth of volatility allow us to complete the first task. The implementation of the second is facilitated by the return of Donald Trump to a strong dollar policy pursued by previous US administrations.
CBOE Volatility Dynamics
While the greenback is looking for reasons for a new attack, the euro cannot raise its head because of pessimistic forecasts and expectations of the verdict of the German Constitutional Court on the legitimacy of the European QE. According to a consensus estimate of 57 economists surveyed by the ECB, Eurozone GDP will drop by 5.5% in 2020, and will recover by only 4.3% in 2021. UniCredit is convinced that the Germans will decide in favor of the European Central Bank, but if this is not so, chaos of unprecedented scale will fall upon the Old World. The inability of EUR / USD to hold above 1.0965 was evidence of the weakness of the bulls. Will their opponents take advantage of it?
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