Summary and Price Action Rundown
US equities slipped from record highs today as wrangling continued today over the US pandemic relief package and UK-EU Brexit agreement. The S&P 500 declined 0.4% today to pare year-to-date gains to 14.8%, as the index adjusts to include Tesla on Monday (more below). The Fed’s announcement after markets closed for regular hours that it would be allowing US banks to resume stock buybacks, but not raise their dividends, lifted shares of JPMorgan 2.9% in after-hours trading as the megabank rushed to announce $30 billion in buybacks. The Euro Stoxx Index broke its four-day rally with modest downside while Asian equities also posted losses overnight. The dollar edged above yesterday’s most recent multi-year low, while longer-dated Treasury yields increased slightly, with the 10-year at 0.94%. Brent crude prices vaulted over $52 per barrel, reaching a new 9-month high, amid stimulus hopes.
US Fiscal Stimulus Negotiations Drag On
Pandemic relief talks appear to be grinding slowly toward a deal, perhaps as early as this weekend, but in the meantime, Congress will either need to pass an omnibus spending bill or another funding extension by midnight tonight or trigger a partial government shutdown. In the final hours ahead of tonight’s midnight deadline to pass a stimulus package alongside the omnibus spending bill, a push led by Republican Senator Toomey to include terms seeking to block the Federal Reserve’s pandemic lending facilities has stymied a final compromise. A provision to prevent the Fed from restarting any of the five lending programs, or create similar ones in the future, has become the main sticking point for Republicans now that the two controversial elements of direct funding for state and local governments and liability protections for businesses have been omitted. “It’s not acceptable for anybody to decide that they’re going to circumvent this law, restart these programs and turn them into something that they were never intended to be,” said Toomey on Thursday. While Senator Toomey asserted that the provision would exclusively target the five programs, Democrats have accused Republicans of specifically constricting the incoming Biden administration and limiting the ability of the Federal Reserve to respond to economic distress in the future. With Republican’s seemingly entrenched over this issue, it is likely lawmakers will fail to reach a compromise this evening, and will either trigger a partial government shutdown when the current spending authorities expire, or Congress will seek to approve another stopgap funding measure through the weekend, allowing more time to resolve the remaining differences. Should any pandemic relief bill fail to pass this weekend, Congress will have until the end of the month when nearly 12 million workers will lose their benefits, on top of the 4.4 million who have already exhausted their benefits, which would further pressure an already distressed economic backdrop. – MPP view: The New York Times reported yesterday that McConnell’s surprising reversal on individual payments and the overall size of the relief bill was spurred by indications that the two GOP candidates in the pivotal Senate runoffs in Georgia are taking heat over the delay of fiscal support. But even with rising economic and political urgency, a deal is still stalled – we see this as a preview of the extreme difficulty the Biden administration will face getting anything through a GOP-led Senate and do not buy the narrative that Majority Leader McConnell will morph into a dealmaker with his old friend Joe Biden in the White House. Our base case has been for something less ambitious than $748 billion lame duck session compromise stimulus (which could be tacked onto the omnibus spending bill) and a somewhat larger deal post-election, but this sequencing could be flipped and total amounts meaningfully larger.
Brexit Talks Enter Another Pivotal Weekend
With negotiations coming down the wire ahead of the year-end deadline for the UK to depart the EU, European officials are calling for a deal by Sunday or face a no-deal Brexit. The pound retreated from its recent highs against the dollar and euro as signals over the prospect for a deal turned more mixed today, with comments from a Bank of England official suggesting the possibility of negative interest rates adding to the downside impetus. EU chief negotiator Barnier expressed continued hope for a deal in remarks earlier today but highlighted the remaining challenges, saying “the path… is very narrow.” Last evening, UK negotiators characterized negotiations as stalled over the thorny issue of fishing rights, as Prime Minister Johnson called the EU position on the issue “not reasonable.” Meanwhile, the European Parliament indicated that Sunday would be the final day for an agreement that could be ratified by the December 31st deadline. This comes after a burst of optimism earlier in the week amid reports that the UK and EU had ironed out most of their differences on the so-called “level playing field” issue involving state subsidies. – MPP view: We are retaining our out-of-consensus call for a hard and/or disorderly Brexit at year-end, as fishing rights remain intractable and the timeline is rapidly dwindling. In such a case, both sides appear to be steering toward the halfway house of a “friendly no-deal,” whereby promises to continue negotiating soften the blow to the pound and financial markets, even if the real-world economic consequences look more like a hard Brexit. Optimism for a deal is riding high, but we do not expect the EU to give much ground from here.
Additional Themes
Tesla Joins the S&P 500 – Electric carmaker Tesla is set to join the S&P 500 on Monday, but the shares of Tesla stock that will be needed to rebalance the index were purchased today at the close of trading in unprecedented volumes. The S&P 500 indexers bought around $85 billion worth of Tesla stock, but other investment funds that track the S&P 500 also purchased the stock, resulting in over 200 million shares traded on the day, as opposed to its normal volume of 40 million. Conversely the same amount of other stocks in the index was sold. Tesla is now the seventh largest stock in the S&P 500, making up 1.52%, which means that for every $11.11 dollar move in the price of Tesla, the S&P 500 will move one point. Shares closed up 0.37% on the day but are also up 65% since it was announced they were joining the index.
Our Latest Podcast! – On this week’s Macrocast, which we produce with our friends at Hamilton Place Strategies, we discuss the last-minute stimulus drama, what to expect in the bill, and the impact this will have on the economy. We also discuss the news coming out of the Fed’s recent FOMC meeting and what this means for its changing monetary mandate heading into 2021, the (continuing) Brexit drama, and the important consumer metrics to look for next week. Please remember to subscribe, rate, and share. Macrocast: “Bad Economics Is Never Good Politics” – Hamilton Place Strategies
Looking Ahead – Next week could feature 11th hour negotiations over both the US pandemic support bill and Brexit, in the event that resolutions to both remain elusive. The holiday-shortened economic data calendar features November personal income, spending, and inflation figures, as well as durable goods orders, and a final reading of third quarter US GDP. Following today’s publication, our next Looking Ahead will be published on January 8th and Sunday’s Market Viewpoints will be the final one of 2020, with the next installment due on January 10th.