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Wall Street bounced back from Delta mutant low on suspected PPT/Biden intervention

calendar 21/07/2021 - 18:47 UTC

·         Infra stimulus and earnings optimism

·         Oil recovered from Delta and OPEC production hike low

·         Biden’s inflation and Fed remark indicates that Powell may indicate some action (MBS QE tapering) in the July meeting to check ‘unchecked’ inflation

The U.S. stock market bounced back Tuesday and continues to recover Wednesday from Delta mutant low on suspected PPT (Plunge Protection Team-NY Fed trading/treasury desk) and Biden intervention. On ‘Black Monday’, U.S. Treasury, Fed, and White House were ‘busy’ with Crypto (Stablecoin) regulation issues and Dow Future plunged almost -725 points on increasing concern about COVID Delta mutant and Bidenflation. But on Tuesday, early U.S. session, Dow Future suddenly jumped from the session low around 34502.00 to a high 34502.00, before closing around 34400.00, covering almost Monday’s entire plunge in an apparent intervention by U.S. PPT as Fed will never allow more than 3-5% loss at a stretch during QE period (thumb rule as per post-2008 GFC). And on early Wednesday, Dow Future was comfortably trading above Friday’s closing levels as if Delta mutant suddenly vanishes!!

Apart from U.S. PPT theory, Dow was also boosted by energy-related shares as oil also recovered from OPEC+ production cut tapering and Delta mutant spikes low as despite gradual production hikes, there will be rebalancing for oil in 2021.

On Bidenflation containment, U.S. President Biden has ‘permitted’ Fed Chair Powell to do whatever is needed; assuring Fed is an independent institution. On 19th July Biden gave a speech on the progress of the economy in the first 6-months of 2021 under his admin (to sell his Build Back Better stimulus plan).

Main highlights of Biden’s speech and Q&A on the economy:

·         Employment situation improving remarkably from around 60K to more than 600K/per month since Jan’21

·         More than 3M new jobs, a record under any Presidency (admin)

·         Highest economic growth in nearly 40-years without ‘ending capitalism’

·         GDP growth projections at over 7% in 2021, the highest for any developed country after COVID

·         We will continue to promote American capitalism with a socialist touch

·         Record GDP growth, job creation with worker’s right despite previous ‘doom & gloom’ predictions

·         American Rescue Plan-expanded Child tax credit at $250-300/pm will be a ‘game changer’ to ease the lives of millions of Child/lower-middle-class Americans; it’s a bottom-up and middle-out approach

·         80% of senior Americans are already vaccinated (COVID); but need to vaccinate a large number of unvaccinated people to beat the pandemic and ‘dangerous, highly transmissible’ Delta mutant spreads

·         We are seeing a mini-pandemic on unvaccinated people, mostly from 4-states; need to beat vaccine hesitancy as COVID does not distinguish any color (red/blue-Democrats/Republicans)

·          Without fully vaccinated the country, the economic recovery would be fragile

·         The current environment of high inflation is transitory, not sticky (persistent) mainly due to global supply chain disruption like automobile chips, leading to lower automobile production and higher prices (demand is much more than supply); now prices are easing for lumber (building materials) and hospitality industry to pre-COVID levels

·         My admin does not want persistently higher inflation over the long term and thus I made clear to Powell Fed is independent and should take whatever steps it deems necessary to support a strong, durable economic recovery:

“Now, I want to be clear: My administration understands that if we were to ever experience unchecked inflation over the long term that would pose real challenges to our economy.  So while we’re confident that isn’t what we are seeing today, we’re going to remain vigilant about any response that is needed. As I made clear to Chairman Powell of the Federal Reserve when we met recently, the Fed is independent.  It should take whatever steps it deems necessary to support a strong, durable economic recovery.”

·         Despite the difference of opinions over the nature of inflation, we should remain united over the passage of the Bipartisan infra stimulus package

·         The Build Back Better plan is a multi-year investment for achieving lower inflation for Americans as it will improve productivity along with more employment and durable price stability

·         The huge corporate tax cut has not helped the U.S. economy to be more productive

·         Corporates have to offer a dignified salary to their workers

·         My investment plan will ensure good-paying jobs even without a college degree and will also ensure a significant impact on GDP growth

·         We have to ensure a fair corporate tax by reforming a minimum global corporate tax

·         We have to improve our infrastructure significantly to improve productivity at an affordable cost

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Finally, Biden said on surging (unchecked) inflation and Wall Street reaction that no ‘serious economist’ suggested so far that the inflation is ‘unchecked’ and despite higher inflation and volatility, Wall Street is now around record-high levels. But Biden also made it clear that he does not see the stock market as the barometer of the economy like Trump did all the times:

“There’s nobody suggesting there’s unchecked inflation on the way — no serious economist. That’s totally different. I mean, look, the stock market is higher than it has been in all of history, even went down this month — even down this month. Now, I don’t look at the stock market as a means by which to judge the economy like my predecessor did.  But he’d be very — he’d be talking to you every day for the last five months about how the stock market is so high — higher than any time in history, still higher than any time in history. So, that’s not how I judge whether or not we have economic growth”.

Bottom line:

Biden virtually admitted substantial further progress on employment and inflation. Powell already admitted inflation not only moderately, but substantially above Fed’s 2% target and good progress on employment. We may see an upbeat NFP job report for July onwards, which may support Fed’s indication for an early QE tapering. Both the White House as well as Fed are under huge pressure on surging inflation, which is fast becoming a political issue ahead of the 2022 mid-term election, Thus we may see ‘some action’ by Fed in July or the coming months on inflation.

At the same time, Biden may rollback ‘Trump tariffs’ on Chinese imports on around $360B worth of goods ($110B on consumer goods and $250B on industrial items/raw materials) to tame inflation in the coming days as a ‘X-Mas gift’ for millions of Americans. Biden is also working hard for a huge fiscal stimulus on both traditional and human infra.

Thus, even if Fed takes ‘some action’ in July or forthcoming meetings to tame ‘unchecked inflation’, Biden stimulus and a possible rollback of ‘Trump tariffs’ may prevent Dow from a sharp correction. The only factor is now Delta COVID mutant spikes probability in the U.S. amid persistent vaccine hesitancy is a large portion of the public; U.S. COVID vaccination is now stalled just below 50% threshold. Powell can take the excuse of such Delta risk amid vaccine hesitancy to buy some time and go for MBS QE tapering by Dec’21 or Mar’22. If Fed starts QE tapering by Dec’21, it may also go for the 1st rate hike in Dec’22 instead of Dec’23.

Technical view: SPX-500, DJ-30, and NQ-100 Futures:

Technically, whatever may be the narrative, DJ-30, SPX-500, and NQ-100 now have to sustain above 34800, 4350, and 14900 levels respectively for a further rally; otherwise, expect some healthy corrections in the coming days again.

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