$1.9 trillion US economic relief plan puts markets into reverse

“The market has given the classic reaction to any major announcement – rally ahead of the anticipated news and fall when the facts are released,” says Russ Mould, Investment Director at AJ Bell.

“Joe Biden has now released details of his proposed $1.9 trillion stimulus plan and while positive for helping to revive the US economy, financial markets have already priced in the good news and are now starting to worry about the negative side, namely how it will be funded.

“The large scale of the proposed support measures adds fuel to the fire that taxes and interest rates will have to go up. Both have negative connotations for equities, therefore casting a cloud on the ability for stock markets to keep rallying at the same pace they have enjoyed for much of 2021.

“However, the Federal Reserve has been at pains to stress that it won’t raise rates any time soon, so it is feasible to suggest that we could continue to see burst of energy among stocks for a while yet.

“Expectations for higher inflation have been driving cyclical stocks such as commodity producers, which is a key reason why the FTSE 100 did so well at the start of 2021 with miners and oil companies leading the way.

“Sadly, this trend has started to lose momentum, with these sectors among the weaker ones on Friday and contributing to a 0.7% drop in the FTSE 100 to 6,757.

“Germany’s DAX index was also weak, down 0.4% with utilities and industrials among the worst performing sectors. The biggest faller was Adidas, down 1.5%. The pound fell 0.3% against the US dollar to $1.3647 while Brent Crude oil dipped 1.2% to $55.76.”

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