Stock market next week: Political instability is another strike against the dollar

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What happens: Political instability often weighs on currencies around the world, and the violence instigated by President Donald Trump is unlikely to bolster confidence in the U.S. dollar at a time of weakness.

Currency markets looked largely beyond last week’s chaos, according to TD Securities strategist Ned Rumpeltin.

“Somehow, the resistance is encouraging,” he told me. “However, we can’t take it for granted.”

Eurasia Group, the political risk consultancy, defined the divided United States as the highest risk for 2021. Domestic political dynamics, coupled with the country’s mismanagement of the pandemic, will make it difficult to reaffirm the role of global leadership in the United States , Joe Biden. despite his best efforts, according to Ian Bremmer, the group’s chairman.

“The United States is by far the most dysfunctional and politically divided of all the advanced industrial democracies in the world,” Bremmer tweeted last Thursday.

Investor Information: Since the period of market turmoil increased last March, the dollar has fallen more than 12% against a basket of other major currencies. The consensus on Wall Street is that it still has room to fall.

“The stars seem very aligned for the weakness of the dollar,” Rumpeltin said.

There are three main reasons why the dollar has been on the back. The main driver is faith in the global recovery thanks to the launch of Covid-19 vaccines. As the United States and the world economy advance, the dollar (a safe haven currency) tends to weaken. Last week, major banks updated their U.S. growth forecasts for 2021, assuming that democratic control of both houses of Congress will pave the way for another stimulus package.

Expectations that central banks will maintain an ultra-light monetary policy, while the recovery heats up, have also contributed. It is also believed that a Biden presidency will usher in a period of greater predictability, reducing the demand for safe haven assets.

The big question, however, is whether political chaos will fuel a long-term erosion of faith in the U.S. dollar, the world’s preeminent reserve currency. For now, the risk seems limited, in part due to the large volume of operations in dollar-denominated assets.

But, as the Eurasia Group points out, American world domination faces real headwinds. One proof: Europe has just finalized an investment agreement with China, designed to rebalance its trade relationship with the world’s second-largest economy, despite concerns from the United States.

“Biden’s tenure opens the era of the asterisk presidency, a time when the occupant of the Oval Office is considered illegitimate by about half the country,” the group said in its prospects of 2021. “This political reality has never occurred in any other G7 country, but it is the reality of the most powerful democracy in the world today.”

How bad was 2020 for much of Corporate America?

A handful of tech companies thrived during the pandemic. But for most companies, it was a sad year, and as the profit season begins, we are about to learn the extent of the damage.

The flow of companies sharing results for the period from October to December is repeated this week. A number will also reveal full year figures.

On record: Delta Air Lines, Citigroup, JPMorgan Chase and Wells Fargo.

Investors have been very attentive to bank profits given what they can tell us about the state of the economy. Given that the U.S. laid off 140,000 jobs in December, much worse than economists had predicted, there will be many questions about loan quality and whether executives are confident in current reserve levels.

However, much of the focus will be on the future. The KBW Bank index, which tracks major US banking stocks, has jumped close to 40% since early November.

This is because Wall Street expects the economic recovery that it believes will be in full swing this summer. The fortunes of banks are closely tied to the way the economy is going. The prospect of higher interest rates, which can increase the amount of money banks earn with loans, also helps.

“There should still be a 10 to 15% higher relative movement in banking stocks and potentially more if the economic recovery lasts several years (before the next recession),” Deutsche Bank analysts said in a recent note to customers.

Until next time

Monday: CES, the consumer electronics program, virtually kicks off

Wednesday: US inflation data

Thursday: Initial unemployment claims in the US; Speech by Jerome Powell; Earnings from Tesco, BlackRock, Charles Schwab and Delta Air Lines

Friday: Retail sales and industrial production in the US; Gains from Citigroup, JPMorgan Chase, PNC and Wells Fargo

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