Today, we will shed some light on the markets’ reaction to the US Capitol riot and analyze possible outcomes
As if the pandemic wasn’t enough for the global economic unrest, outrageous events in the most historically and politically significant buildings of the USA questioned the position of the world’s reserve currency.
Trouble in the House of Congress
The center of the US legislation, the grand Capitol building in Washington DC was occupied by the rioting mob on January 6, 2021. Violence and anarchy interrupted congressmen trying to finally certify the election results. President Trump’s supporters still consider the victory of Joe Biden to be illegal, although no evidence of voter fraud has been discovered.
After a temporary halt, the Congress resumed vote-counting and affirmed President-elect Joe Biden’s Electoral College victory over President Trump. The city’s authorities ordered a public emergency state for 15 days. Stronger law enforcement measures are supposed to last until the planned inauguration. Obviously, the administration-to-come expects protesters might gather again preventing the peaceful transition of presidential power.
Meanwhile, global political leaders expressed their deep concern over the US events. Several foreign embassies in Washington issued stay-at-home notices for their citizens, and many diplomats described the riot as an attack on democratic values deeply embedded in the American culture.
Iranian President Hassan Rouhani said something many were thinking to themselves: “What happened in the US shows how fragile Western democracy is.” Furthermore, many Russian lawmakers hinted this was the sign of American decline as a global democratic leader.
Impact on the financial markets
It has been noted how significant an impact economic crises can have on US politics. One source analyzed the performance of the S&P 500 in comparison with US election results to discover an 87% success rate in making such a prediction. Yet the chaos on the Capitol Hill and indignation of the international community doesn’t seem to have to lead the global market assets astray.
Despite the protests, the Dow Jones Industrial Average closed at a record high on Wednesday, January 6. The result is linked to the prospects of corporate profit growth. The bullish mood on Wall Street is encouraged by democrats winning the majority seats in Congress. Investors expect Biden’s team to implement a more progressive policy, including at least $1 trillion fiscal relief.
On Friday, January 8, another surge in the stock price took place. As president-elect Joe Biden demanded huge immediate fiscal support, the Dow Jones industrial average and S&P 500 closed at record highs again.
The dollar climbed up from the rocky bottom against a basket of major currencies on Friday too. Both the euro and the pound weakened against the dollar as it gained strength. With some volatility, the dollar index is currently about 90.1%.
The long-term outlook for the greenback, however, remains bearish. Unexpectedly large budget and current account deficits have made the US currency an increasingly unattractive investment, while prospects of a swift economic recovery eroded its safe-haven demand.
At the same time, most investors believe the soundness of U.S. assets has not been shaken so far. Experts refer to historic examples to point out that financial crises have often had the reverse effect of asserting the dominance of U.S. assets even when the U.S. was the source of the crisis.
As for the crypto-market, investors watch the rally unfold at unbelievable speed. Bitcoin skyrocketed to $40,000 on Thursday, bringing the total value of the cryptocurrency market above $1 trillion for the first time. The leading cryptocurrency is up over 30% since the start of 2021, having surged 400% in the past 12 months. The surge gives rise to more bullish predictions on BTC price.
Prices of altcoins, such as ether, litecoin, and bitcoin cash, have also risen dramatically. New investors are rushing in, afraid to miss out on profitable crypto opportunities. Crypto exchanges and online trading platforms are witnessing another spike in activity.
As noted by Bloomberg, the stock market did a better job of digesting the painful scenes in the U.S. Capitol than many of those individuals watching. The upward trends that were already present, remained stable.
Jim Cramer also pointed out that the Capitol riot was a one-off event that didn’t define broader perspectives for companies and markets. The Mad Money host explained that such a heavy blow on democracy had nothing to do with money-making. Cramer noted that American political future and stock prices don’t have a direct correlation. “I think everyone wants unity, but a divided country created a very good stock market,” he said.
Wall Street Journal agreed that investors largely ignored the shocking incident, focusing on what the shift of political power from Republicans to Democrats means for the market. Taking into account the confirmed Biden’s victory and assurances of an orderly power transition, the riot shouldn’t impact markets in the future. However, the expected stimulus surely will.
If President-elect Biden succeeds in pushing the stimulus package announced as a part of his election program, households may receive up to $2,000 in relief funding. However, Congress is too closely divided to bet on the full acceptance of the proposed conditions.
Besides the increased chances of survival for businesses and individuals, enormous fiscal spending might have another knock-on effect that is inflation. Before the riot and final Congress seat-count, experts predicted inflation to rise temporarily to about a 2% level while quickly getting subdued. It doesn’t seem likely that recent political events in the US would significantly change those forecasts. As the BlackRock Investment Institute predicts, the US macroeconomic picture will be defined by the successful deployment of vaccines and debt trajectory dynamics, rather than political turmoil.
Goldman Sachs CEO David Solomon is also preparing for more stock market volatility. He observes that stock prices are running away from reality, with investors showing excessive enthusiasm.