Summary and Price Action Rundown
Global risk assets are rising this morning as investors ponder the ramifications of President Trump’s Covid-19 infection for the US political and policy outlook. S&P 500 futures point to a 0.6% higher open after the index sold off sharply on Friday but bounced from the lows of the morning to close at -1.0%, paring its year-to-date gain to 3.6%, which is 6.4% below early September’s record high. Equities in the EU and Asia were also generally higher overnight. Ebbing demand for safe haven assets is seen in a weaker dollar and slightly higher longer-dated Treasury yields this morning, with the 10-year yield at 0.71%. Brent crude prices are recovering a portion of last week’s steep downtrend, bouncing back above $40 per barrel.
Political Uncertainty Eases on President Trump’s Covid-19 Prognosis
Indications over the weekend that President Trump is on the path to recovery from his coronavirus infection are slightly moderating investor anxieties over the political and policy outlook. Despite garbled messaging over the timeline of President Trump’s diagnosis alongside varied indications of his condition and a lack of full transparency, investors are broadly assuming that the risk of a worst-case outcome have diminished. A statement over the weekend by his doctors that President Trump may be released from the hospital as early as today have also eased some concerns, though commentators suggest that this may be an aspirational possibility rather than a realistic one. President Trump has continued to tweet and is not stepping away from his campaign, though it is unclear when he might be able to return to full activities such as rallies and fundraisers. Analysts are pondering the ramifications of this episode for the election, as a WSJ/NBC poll released over the weekend showing Joe Biden extending his lead following Tuesday’s debate was taken before President Trump’s diagnosis. A closely-followed prediction market has reflected rising odds of a Biden win over the past week and is now near its highest level for this election cycle after registering a peak 66% likelihood late last week. Biden thus far has tested negative for Covid-19. A Vice Presidential debate is currently scheduled for Wednesday.
Narrow Hopes Remain for Fiscal Stimulus
The Senate is out of session now until October 19th and gaps remain between the terms offered by House Democrats and the White House, but glimmers of hope persist as both sides highlight the need for a deal. From the hospital over the weekend, President Trump redoubled his support for a pandemic relief bill via Twitter, calling for both side to “get it done.” However, gaps remain between the House Democrats and the White House, particularly in the area of aid to states. However, the tone may have improved as House Speaker Pelosi noted that the illness of the President and other GOP figures “changes the dynamic” and stated that negotiators “have to find a path.” She also called on US airlines to hold off on planned layoffs and furloughs, indicating that a forthcoming deal would provide payroll support. NEC Director Kudlow also sounded relatively optimistic notes in his commentary on Friday. For context, the House passed the Democrat-drafted $2.2 trillion version of the bill last Thursday night and went on recess, but would be recalled in the event of an agreement. Even if House Democrats and the White House agree, passing the Senate may be difficult, with the Republican-led caucus primarily focused on confirming Judge Amy Coney Barrett to the Supreme Court once it reconvenes mid-month.
Euro Holds Up Despite Mixed Data – The euro is continuing its rebound against the dollar this morning, re-approaching the more than two-year highs of August, after a reading of regional retail sales for August handily topped estimates. The 4.4% month-on-month acceleration bettered expectations of 2.5% and July’s -1.8% pace, yielding a 3.7% year-on-year expansion versus a forecast of 2.2%. However, more contemporaneous data in the EU has been less encouraging, and the recent signs of a second wave of Covid-19 in various continental hotspots may already be weighing on economic activity in the bloc. September service sector purchasing managers’ indexes (PMIs) for Spain and France, where outbreaks are recurring, have moved back into sharply contractionary territory.
Brexit Negotiations Intensify – Ahead of UK Prime Minister Johnson’s self-imposed October 15th deadline to forge a trade deal with the EU ahead of its exit from the block at year-end, the wrangling is continuing over key sticking points. Chief negotiators for the EU and UK both characterized the challenges remaining in their statements late last week, with the EU’s Barnier noting “persistent serious divergences” and the UK’s Lord Frost cautioning that the fishing rights dispute may be “impossible to bridge.” PM Johnson spoke over the weekend with European Commission President von der Leyen and negotiations will be ongoing until the EU summit at the end of next week.