A pullback in US consumer spending is probably the most significant risk for the S& P500 and equity markets in general.
With services making up around two-thirds of overall spending composition, the recovery in this part of the economy is essential if the US markets have any chance to finish the year on a high.
However, several weeks have now passed since critical relief programs from the CARES Act expired. The US Congress remains deadlocked. Senate Republicans are looking to pass a bill this week without the Democrats.
And with the battle for tech domination between the US and China taking on a more sinister connotation, things could still turn ugly quickly again.
A crucial part of any USD-weaker narrative is that the US Federal Reserve will allow the economy to run hotter under its new policy framework. The US dollar will bear the brunt of its dovishness relative to other central banks. So nothing should change there.
A rally in EURUSD and CNH is also a pre-requisite for broad USD weakness. This Thursday’s European Central Bank (ECB) meeting is an important test, as markets remain focused in the context of ECB Chief Economist Lane last week pushing back against euro strength, and Executive Board member Schnabel’s more relaxed take on the currency.
It’s hard to envisage a round of new stimulus from the ECB (or a new framework) that could undermine EUR on a sustainable basis.
Oil remains under pressure
Oil is getting influenced by broader risk sentiment today, which remains in a state of unease as the palatable level of central bank uncertainty is on the rise across all asset classes.
Gold struggles to find buyers
Gold struggles to find buyers as the dollar trades well ahead of a mountain of new US bond issuances this week, which could prove to be a mountain to climb for gold bulls.