The White House and Congress have talked
‘Bout stimulus but both sides balked
Still, hope springs eternal
That both sides infernal
Intransigence will get unblocked
Throughout 2019, it seemed every other day was a discussion of the trade deal with China, which morphed into the Phase one trade deal, which was, eventually, signed early this year. But each day, the headlines were the market drivers, with stories about constructive talks leading to stock rallies and risk accumulation, while the periodic breakdowns in talks would result in pretty sharp selloffs. I’m certain we all remember those days. I only bring them up because the stimulus talks are the markets’ latest version of those trade talks. When headlines seem positive that a deal will get done, stock markets rally in the US, and by extension, elsewhere in the world. But, when there is concern that the stimulus talks will break down, investors head for the exits. Or at least algorithms head for the exits, its not clear if investors are following yet.
Yesterday was one of those breakdown days, where despite reports of ongoing discussions between Treasury Secretary Mnuchin and House Speaker Pelosi, the vibes were negative with growing concern that no deal would be reached ahead of the election. Of course, adding to the problem is the fact that Senate Majority Leader McConnell has already said that the numbers being discussed by the House and Congress are far too large to pass the Senate. Handicapping the probability of a deal being reached is extremely difficult, but I would weigh in on the side of no action. This seems far more like political posturing ahead of the election than an attempt to address some of the current economic concerns in the country.
Yet, despite yesterday’s negativity, and the ostensible deadline of today imposed by Speaker Pelosi (we all know how little deadlines mean in politics, just ask Boris), this morning has seen a return of hope that a deal will, in fact get done, and that the impact will be a huge boost to the economy, and by extension to the stock market. So generally, today is a risk-on session, at least so far, with most Asian markets performing nicely and most of Europe in the green, despite rapidly rising infection counts in Europe’s second wave. Remember, though, when markets become beholden to a political narrative like this, it is extremely difficult to anticipate short-term movements.
Down Under, the RBA said
We’re thinking, while looking ahead
A negative rate
Is still on the plate
So traders, their Aussie, did shed
While the politics is clearly the top story, given the risk-on nature of markets today, and the corresponding general weakness in the dollar, it was necessary to highlight the outliers, in this case, AUD (-0.4%) and NZD (-0.5%), which are clearly ignoring the bigger narrative. However, there is a solid explanation here. Last night, between the RBA’s Minutes and comments from Deputy Governor Kent, the market learned that the RBA is now considering negative interest rates. Previously, the RBA had been clear that the current overnight rate level of 0.25% was the lower bound, and that negative rates did not make sense in Australia (in fairness, they don’t make sense anywhere.) But given the sluggish state of the recovery from the initial Covid driven recession, the RBA has decided that negative rates may well be just the ticket to goose growth once covid lockdowns are lifted. It is no surprise that Aussie fell, and traders extended the idea to New Zealand as well, assuming that if Australia goes negative, New Zealand would have no choice but to do so as well. Hence the decline in both currencies overnight.
But really, those are the only stories of note this morning, in an otherwise dull session. As I mentioned, risk is ‘on’ but not aggressively so. While the Nikkei (-0.4%) did slip, we saw modest gains in Shanghai (+0.5%) and Hong Kong (+0.1%). Europe, too, is somewhat higher, but not excessively so. Spain’s IBEX (+0.85%) is the leader on the continent, although we are seeing gains in the CAC (+0.4%) and the FTSE 100 (+0.3%) as well. The DAX (-0.3%), however, is unloved today as Covid cases rise back to early April levels and lockdowns are being considered throughout the country. Finally, the rose-tinted glasses have been put back on by US equity futures traders with all three indices higher by a bit more than 0.5% at this hour.
Bond markets, however, are following the risk narrative a bit more closely and have sold off mildly across the board. Well mildly except for the PIGS, who have seen another day with average rises in yield of around 3 basis points. But for havens, yields have risen just 1 basis point in the US, Germany and the UK.
Commodity prices are little changed on the session, seemingly caught between hopes for a stimulus deal and fears over increased covid cases.
And lastly, the dollar is arguably a bit softer overall, but not by that much. Aside from Aussie and Kiwi mentioned above, only the yen (-0.15%) is lower vs. the dollar, which is classic risk-on behavior. On the plus side, SEK and NOK (both +0.5%) are leading the way higher, although the euro has been grinding higher all session and is now up 0.4% compared to yesterday’s close. There has been no news of note from either Sweden or Norway to drive the gains, thus the most likely situation is that both currencies are simply benefitting from their relatively high betas and the general trend of the day. As to the euro, the technicians are in command today, calling for a move higher due to an expected (hoped for?) break of a symmetrical triangle position. Away from these three, though, gains are extremely modest.
In the emerging markets, CZK (+0.7%) is the outlier on the high side, although there is no obvious driver as there have been neither comments by officials nor new data released. In fact, given that Covid infections seem to be growing disproportionally rapidly there, one might have thought the Koruna would have fallen instead. But the rest of the CE4 are also firmer, simply tracking the euro this morning as they are up by between 0.3%-0.4%. There have been some modest losers in the space as well, with THB (-0.25%) leading the charge in that direction. The Thai story is a combination over concerns about further stimulus there not materializing and anxiety over the political unrest and student protests gaining strength throughout the nation.
On the data front, this morning brings Housing Starts (exp 1465K) and Building Permits (1520K), as well as four more Fed speakers. Yesterday, Chairman Powell was not focused on monetary policy per se, but rather on the concept of digital currencies, and specifically, central bank digital currencies. This is something that is clearly coming our way, but the timing remains unclear. One thing to keep in mind is that when they arrive, interest rates will be negative, at least in the front end, forever. But that is a story for another day.
Today, we are beholden to the stimulus talks. Positive news should see further risk accumulation, while a breakdown will see stocks fall and the dollar rebound.
Good luck and stay safe