The first half performance of world’s stock exchanges ended with a moderately negative result, if some notable exceptions such as the Chinese market and the US Nasdaq are excluded, however, this is a result that was difficult to predict at the end of March when the indices were down an average of 30% from beginning of the year.
During the period, therefore, there was a recovery in prices which graphically resembles a “V”, as has occurred other times in recent stock exchange history. It is now clear that this rapid recovery largely depends on the prompt and massive reaction of the world central banks which in a few months doubled their balance sheets, creating almost 30 trillion in new liquidity, 4 times higher than the intervention of 2008. But unlike what happened during the previous banking crisis, on this occasion in Europe the failed attempt of imposing austerity on the weaker countries was abandoned, instead accompanying monetary measures with an accommodative fiscal policy as evidenced by the EU Recovery Plan from 750 billion, an increase in public expenditure equal to 25% of GDP decided by France, that of 40% of Italy and that from 45% of GDP decided by Germany accompanied by a reduction in VAT rates. The first consequence of this European change of pace, which is added to the similar fiscal measures taken in the USA and Asia, should be a recovery of world GDP higher than the current estimates of professionals, therefore with a V-shape similar to that so far recorded by stock indices.
This hypothesis offers a fundamental explanation to the recovery witnessed in the same since April and to its ability to maintain the levels reached, manifested in recent weeks. In fact, the lateral movement of the indices starting from the end of May appears more like an accumulation rather than a distribution phase. But this different approach of European governments and monetary authorities would also have important consequences on the foreign exchange market, with particular attention on the US dollar, which may have already seen the peak of external parity relative to the long bullish phase which began in 2010 following the previous financial crisis. In fact, the past two decades have been characterized by the search by international investors for safe havens represented by sovereign public debt, in particular US bonds which offered attractive yields and were the only alternative available given the scarcity of European issues during a decade characterized by austerity and therefore from a contraction in public spending. The strong demand for dollars that occurred in the two-year period 2015-2016 by the Chinese in the wake of the easing of control over the exchange rate desired by the Beijing government has long since exhausted its effect.
So now the flow of international capital to the dollar could gradually contract, in the sense that the imposing liquidity creation effort implemented by the FED, about 5000 billion dollars in a few months, and the equally important fiscal policy interventions implemented by the Trump administration implying a significant increase in the government deficit, have negatively changed the medium-term outlook for the current greenback exchange parity rate. From a technical point of view, the first important support for the dollar / euro exchange rate is at 1.16, whose breach does not appear imminent but, if it should happen, would confirm the thesis of a fundamental trend inversion of the greenback. Even the recent strengthening of the gold price above $ 1700 an ounce seems to support the hypothesis of a change of course of the dollar, given the inverse relationship that traditionally characterizes the two asset classes.
Nicola Bravetti Data Source: Bloomberg
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