European and US stock futures are trading modestly lower on the final day of the trading week. Rising bond yields and soaring inflation have been less of a concern for market players this week. Investors need to embrace the possibility of much higher volatility in the stock market in the coming weeks.
That is because the US President, Joe Biden, passed the $1.9 trillion stimulus package yesterday. This means that Americans are going to get their third stimulus cheques worth $1,400.
The chances are that half of this stimulus cheque money will be heading straight towards the stock market, or it could be even more as some retail traders are looking for a bigger bang for their buck.
It is highly likely that we will see another episode of stock volatility that we experienced back in December. But this time, it could be on a much larger scale. Americans are likely to get their cheques from next week. Stock volatility isn’t the only thing that we may see; these retail traders will likely follow pretty much anything that is hyped over the internet.
NFTs and Bitcoin
NFTs are certainly one of them, and some NFT tokens are soaring at an eye-popping rate, as the new fad in the crypto arena. Of course, the US stimulus cheques will also allow retail traders to park some portion of their funds in Bitcoin. Given that buying Bitcoin has become a lot easier now, and more companies are involved in this space, we believe another massive rally is strongly on Bitcoin’s horizon.
In the currency market, we see the Euro-dollar pair pulling back today after a decent rebound yesterday, on the back of the European Central Bank’s decision. The truth is that not many were expecting any kind of surprise coming from the ECB, but the ECB had to send a firm message to markets which it did—the ECB support is not going anywhere.
The bank confirmed that it would increase its asset purchase programme significantly over the next quarter. For the past few weeks, these asset purchases were coming in somewhat weak, and investors started to anticipate that the ECB may be becoming more confident about the economic recovery in the Eurozone.
We believe that the ECB’s decision to increase its asset purchase programme is not targeted towards economic recovery but to address investors’ concerns about rising bond yield. By saying that the bank is going to ramp up the asset purchase programme over the next quarter is just another way of saying that the bank is not thinking of changing its dovish monetary policy stance.
We think that the ECB’s decision has widened the policy gap between the Fed’s monetary policy and the ECB’s monetary policy. The Fed doesn’t think that they need to increase their asset purchase programme while the ECB is doing exactly that. It means that we may see a wider difference in inflation between the two central banks in the future.
One could say that the confidence isn’t fully restored among the ECB policy members about the economic recovery, and this could be because of the setback that we are consistently witnessing with respect to vaccine rollouts. The vaccine usage was stopped in some of the countries because of the increased risk of blood clots.
The bottom line is that the Euro is likely to underperform against the dollar in the coming months because of the wider difference in the two banks’ monetary policies.