It’s been an incredibly choppy 24 hours for financial markets. Things kicked off yesterday towards the end of the US trading session when US President Trump announced via Twitter that he had opted to instruct his team to halt fiscal stimulus negotiations with the Democrats until after the election. He accused US House Speaker Pelosi (the leader of the Democrat majority in the House) of negotiating in bad faith.
The market reaction was swift; a flight to safety was witnessed with USD and JPY swiftly rallying at the expense of most of their other G10 major counterparts (though the more risk sensitive currencies such as AUD, NZD and NOK were hit the worst). More specifically, DXY made overnight highs around 93.90 (having been around 93.50 prior to the announcement), EURUSD fell to the 1.1720s from roughly 1.1780, AUDUSD fell to 0.7100 and NZDUSD fell below the 0.6600 mark. Stocks also tumbled, and bonds rallied.
But this initial reaction was short lived. As the overnight/Asia session got underway, the US President continued to tweet, in which he called on Congress to pass “piece meal” stimulus packages, including aid for airlines, a new payment protection programme for small businesses (where the government helps small businesses cover the wages of employees) and for individual stimulus checks of $1200 each to be sent out.
Thus, with the prospect of at least some stimulus on the table, markets have staged a rebound. DXY has slid back into the low 93.60s, only a few points higher than were it was in advance of the initial Trump announcement to halt talks on stimulus. AUDUSD has recovered back to around 0.7150 and USDCAD back below 1.3300, having reached overnight highs close to 1.3350.
Similarly, US equities have almost fully recovered to pre-initial Trump announcement levels; the S&P 500 trades around 3390, compared to yesterday’s highs which were just above 3400, and the S&P 500 index itself is 1.1% higher on the day.
QUICK EXPLAINER: Why do markets want stimulus so badly?
The US economy has been badly damaged Covid-19 and the fear it has triggered in consumers, as well as the impact of harsh lockdowns. Businesses were forced to shut, and although the US is now mostly reopened at this point, demand in many areas of the economy is still well below pre-pandemic levels. When the country’s income (or GDP, as economists call it, which stands for Gross Domestic Product) falls like this, the government can borrow money to make up the shortfall – i.e. paying people’s wages in industrial that have been sent into lockdown, or sending people direct stimulus checks to make up for lost income, or bailing out struggling business that would otherwise be doing well.
Back in April, Congress passed a HUGE fiscal stimulus package called the CARES act, which pumped the US economy with trillions. This stimulus has been credited with helping the economy recover initially at a much faster than expected rate. However, most of those payments expired in July. The FOMC has been urging the US government to pass another stimulus package, and the economy has already shown signs of slowing. Another stimulus package would be a BIG boost to the economy, thus helping company earnings (and so the stock market), helping commodity demand and would thus boost risk sensitive FX at the expense of havens such as USD and JPY.
So what next?
I get the feeling that the Democrat Majority in the House will feel the pressure to pass at least some of these smaller fiscal stimulus bills.
Clearly airlines need aid, as do small businesses and many Americans could desperately do with getting $1200 in their pockets. The Democrats do not want to come across as being the bad guys who prevent the American people getting the help they need.
Unfortunately for them, passing even small stimulus packages would boost stocks and the purchasing power of voters right ahead of the election, likely favouring Trump (economic improvements typical favour an incumbent President). Trump would also be able to present the situation as a win and evidence of him “delivering for the people”.
But with Democrat Nominee Biden on average 8% ahead of Trump in national polling, they may be able to afford a slight squeeze in the polls.
If some of these “piece meal” stimulus packages to make it through over the next few weeks, it ought to support sentiment going into the election, which will continue to be the main focus of the market; remember, market’s want to avoid a contested outcome, which results in the highest levels of policy uncertainty.
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