There is a growing perception that the worst for stocks could be over. The latest winning streak in the US stock market with little downside pressure is indicative of relative market consensus about the appreciation and scaring indifference to news headlines related to coronavirus. At the same time, we are witnessing global weakening of the dollar, which resembles reversal after reaching global top what makes shorts pretty attractive. This makes sense if we recall that the dollar has been driven primarily by defense motive recently and the status of safe heaven was reinforced by lack of liquidity in key US financing markets, which in turn was reinforced by fears that this lack of liquidity will intensify.

After the announcement of the Federal Reserve’s direct intervention by launching special buyout programs (“credit facilities”), rates in these key markets went down:

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And now the dollar is falling precisely on the same factor on which it rallied, only with a negative sign: confidence that the liquidity crisis has been passed. That is exactly the reason supporting growth of risk assets, reflecting the expectations of investors that companies won’t have difficulty to borrow. The economic consequences of quarantine continue to stew in the background. The fair value of the dollar index, before the liquidity issues arise in mid-February, is hence near 98 mark, where it is likely to find medium-term support.

A side effect of all those Fed support measures, as I wrote in my previous posts, is quite robust rise of inflation expectations:

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What do you think about an inflation threat from the current Fed balance sheet expansion? Will it be different from last rounds of QE?

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