March 25, 2020

US Fiscal Aid Package Approved

US Fiscal Aid Package Approved

The deal is finally here. Democrats and Republicans have agreed on a massive stimulus aid package. Traders have been eagerly waiting for this $2 Trillion aid package that is likely to bolster the US economy. There is no doubt that the US desperately needed this aid package to stem the outbreak of Coronavirus.

However, whether traders have already priced in this aid package in terms of equity markets price action, is a sperate question. This is because the Dow Jones surged more 11% yesterday, the biggest one-day surge since 1933. If the sell-off was intense, the bounce is even harder.

Dead Cat Bounce?

Some question if the current rebound in the equity markets is a dead cat bounce or, have the equity markets put a bottom? If the equity markets have put a bottom, then investors have the opportunity of the decade on their doorsteps because major indices such as the S&P500 and the Dow Jones are still down over 25% from their all-time high.

Don’t Be Fooled

I do think that yesterday’s bounce was nothing more than a dead cat bounce and that markets are likely to fall more. The fact which supports the above argument is that we have not seen much money inflow in the Vanguard S&P500 ETF. The estimated money flow shows only $306 million going into the fund. This number doesn’t excite me in any way because it doesn’t even outshine the normal average figure. The situation is pretty much similar for the SPDR S&P500 ETF Trust, no mammoth numbers there at all.

No Excitement!

Looking at the US futures, there isn’t much excitement there. Yes, the US futures are trading higher by 100 odd points, but if the aid package news wasn’t baked into the price, then we should have seen a surge of over 1000 points. Today’s gains are abysmal.

Data Is King

The economic numbers remain the key factor for markets and they do have the ability to bring extreme movement in the equity markets. It is pretty much a given that the numbers are going to be abysmal, but for how long? This factor seeks attention.

Given the massive fiscal and monetary policy bazookas we have witnessed so far, we should see the consumer confidence numbers supporting the sentiment by printing some sturdy readings. An improvement in the sentiment data is something that we need, and this could curtail the recovery period.

Oil

In terms of commodity prices, crude is up over 3% today. Investors are cheerful about the current measures, the loose monetary and fiscal policy, they may help the oil demand. But given the fact that there is serious lockdown over in India, and the country remains the third biggest consumer of oil, the demand equation is bound to be affected. In terms of supply, there are still no signs of a green flag, the supply war continues between Saudi Arabia and Russia. Who will blink first despite the massive damage?

Gold

The precious metal has become a darling among traders because they know the loose monetary policy is going to push the price higher. This is the base case as long as we do not see colossal margin calls in the equity markets that force institutional funds to sell their positions in gold to provide a safety net for their portfolios. It is highly likely the price may have another go at the 1700 mark in the coming weeks and the path of least resistance is skewed to the upside.

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