The week continues to get uglier for the US dollar, which has today fallen over another 40 points, taking it below the 93.00 level and into the 92.60s, its lowest point since early September. Meanwhile, US equities trade with solid gains (unlike European equities, which seem to be feeling the weight of Covid-19 concerns) and US bonds are being sold. All told, US markets are VERY much risk on today, why?
The "will they won’t they" saga US fiscal stimulus continues…
Whether or not markets will be getting a big dose of US fiscal stimulus prior to the election has been one of the dominant themes thus far on the week; pretty much, as far as markets are concerned, the sooner fiscal stimulus can come, the better. That’s because the last fiscal stimulus package expired back in July, and the US economy, though continuing to recover from the initial sharp drop due to lockdowns back in March and April, has slowed (seen most predominantly in the labour market). The sooner the US economy gets the boost of fiscal stimulus then, the better for near-term economic growth (and the happier markets are).
But the importance of getting the fiscal stimulus done prior to the election isn’t only seen as a good thing by markets because it means the stimulus is coming sooner. One could argue that if we don’t get a stimulus package passed before the election, it will most likely have to wait until at least January.
Think about it…
Imagine Biden wins and gets a majority in the Senate (as expected at this point, given his hefty lead in national and swing state polling). Is the Trump Administration going to spend its last 6 weeks working constructively with the Democrats to get fiscal stimulus done… probably not. Moreover, the Democrats might be tempted not to negotiate properly with the Republicans given that they can just wait it out until January, then pass the bill exactly how they want it (i.e. no compromises needed). Pretty much, stimulus in November or December would be unlikely.
Imagine the result is much closer and neither candidate concedes the result, resulting in a contested outcome that takes weeks to resolve in the Supreme Court. In that case, the Democrats and Republicans will be too busy fighting over the election outcome to engage constructively in talks.
Then imagine if Trump is re-elected and maintains his majority in the Senate; Senate Republicans might then feel less pressure to say yes to a big fiscal stimulus package then they do right now (right now they know that a big stimulus package would help Trump’s re-election chances and many would vote for it, even if they oppose it in principle).
So pretty much, its stimulus now or most likely we will be waiting until January.
So where are we at?
Stimulus “optimism” continues to wax and wane, taking market sentiment with it. Right now, momentum towards a deal appears to be picking up, which is why stocks are up and USD and bonds are down. Here is the latest;
Reports last night suggested that US House Speaker Pelosi and Treasury Secretary Mnuchin are moving closer to a stimulus deal and will speak again today. Moreover, Pelosi said she is optimistic on a possible Covid-19 relief, hopes to reach an accord by the end of the week and thinks there can be more Covid-19 related aid before election day.
More recently, White House Chief of Staff Meadows said that the Trump administration and Democrats have a goal of getting Covid-19 aid deal in the next 48 hours and White House Economic Advisor Larry Kudlow said that it is a 'sunny, optimistic morning' regarding Covid-19 stimulus negotiations.
The only concern remains the possibility that any deal that might be agreed by the White House and Republicans might not make it through the much more fiscally austere Republican controlled Senate. However, Senate Republican Leader McConnell said the Senate would consider a larger Covid-19 deal if one is reached between the White House and House Speaker Pelosi.
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