The new year for stock markets started without significant changes with respect to the underlying trend that characterized the dynamics of the stock markets from last spring.
The explanation for the confirmation of the bullish phase lies in the foreseeable continuation of accommodative monetary and fiscal policies that will probably continue for a few more months, until, thanks to mass vaccinations, economic activity will normalize. To quantify, we can take for example the United States, where in less than a year, the Fed has increased its balance sheet from 20% to 33% of GDP, while Congress has allocated 2.4 trillion in 2020, equal to 12% of GDP, and recently approved an additional package of measures worth 1.9 trillion. Precisely the generalized dimensional equivalence between monetary and fiscal measures by all countries affected by the pandemic, constitutes the big difference compared to what was implemented in the aftermath of the great financial crisis of 2008, when the burden was left to monetary policy alone to restart the economy, with the result that has been duly noted. From this consideration, a question arises that must be answered correctly, as its content risks decisively influencing the performance of the international securities markets in the months to come.
In fact, since October, the belief has made its way among insiders that the enormity of the stimulus measures implemented, four times higher than those of 2009, will cause an inevitable resurgence of inflation. This explains the rise in gold up until December and that of silver still in progress, the strong interest in cryptocurrencies, the doubling of the yield on long-term US government bonds and in general for the shares of companies operating in the sector of raw materials. But this thesis could prove to be shaky, recalling that inflation is generated mainly through two types of increases in price variables, that of demand and that of costs. The enormity of debt taken on by both the public and private sectors in order to handle two systemic crises in 12 years, objectively prevents the overcoming of the structural deflationary phase, as evidenced by the Japanese experience of the last thirty years. It should also be noted that the start of the disinflation phase of developed economies dates back to 1989, when the Berlin Wall fell, freeing an unforeseen amount of productive capacity and cheap labor. The crisis of 2008, instead, entailed the start of the deflationary phase, of a structural nature until proven otherwise, further exacerbated starting from last spring, due to the pandemic crisis. So, if it seems acceptable that in the next three to six months monthly trend rates of inflation may rise, even in the vicinity of the fateful 2% indicated by the FED for the US economy, risks being just a reflex effect destined to retrace itself due to the collapse of the same 12 months earlier. Therefore, the stock markets will continue to be characterized by the sectoral rotation of demand with a positive underlying trend, discounting a gradual return to economic normality starting from the second quarter, but not necessarily a return of inflation. From a technical point of view, the indices appear tired, after the recent adjustments of the historical and period highs, therefore oriented towards a modest corrective phase as soon as the latter half of February, a hypothesis also confirmed by the recent recovery of the dollar, which fell below the 1.20 towards the Euro, but also destined to weaken again in the spring, towards 1.23 / 1.25 which could represent the minimum for this year. In fact, in the second half of the year the greenback could stabilize, eliminating the inflationary contribution of the rise in import costs to the US. To quantify the technical picture on the stock markets, the S&P 500 index’s first support level is 3830, followed by the 3714 level, from where it has just rebounded, to reach 3640, where an eventual correction should end. In the case of the EuroStoxx 50, the current maximum for the period, 3658, projects an attempt to rise towards the 3850 level by mid-year, but in the meantime the short-term weakness could translate into a movement towards supports at 3485 and 3400 points.
Nicola Bravetti Data Source: Bloomberg
“This report cannot – nor can – be considered a solicitation to invest in financial instruments”