With the fiscal stimulus likely to be off the table, carrying the load of the US economy will fall on the shoulders of the Federal Reserve once again. December’s FOMC meeting is now “live” with new monetary policy initiatives almost certain. Negative interest rates are unlikely to be among them, but bond yields, after having spiked ahead of the election on blue wave expectations, have now reversed and started tracking lower again. Negative bond yields at the short end of the curve cannot be discounted as we head into 2021.
The miraculous arrival of Covid-19 vaccines that could be manufactured in huge volumes quickly, and then distributed widely, could still change that equation before the end of the year. If 2020 has taught us anything, however, it’s that assumptions are perilous, and plans - if there are any - only last as long as the first engagement.
Financial markets have rallied today in the warm afterglow of Biden’s apparent victory. While the US remains divided, the sighs of relief can be heard from the rest of the world, with no polling required. The value of the US Dollar has fallen, notably against pro-cyclical Asian and commodity currencies. Equities are climbing higher, a trend that started last week even before the votes were counted. Commodities are rallying.
It is clear that a huge amount of capital - likely stored as US dollar, Japanese yen and Swiss franc cash - had been waiting on the sidelines until the US elections passed. Markets needed no second-guessing for the floodgates to open and the global recovery trade to return to its pre-election self.
With the Federal Reserve and the European Central Bank both set to ease more in December, the debasement of the US Dollar could well continue into the new year and perhaps much of 2021. In that environment, as investors search for yield in a zero percent interest rate world, equity and commodity asset price inflation may well continue to flourish.