Summary and Price Action Rundown
Global risk assets are steadying this morning as the long-delayed US pandemic relief package heads to the President’s desk, Brexit negotiators soldier on despite more setbacks, and vaccine rollout continues apace. S&P 500 futures indicate a 0.2% gain at the open after the index closed with a modest 0.4% loss yesterday after being down nearly 2% in the morning, shaving year-to-date gains to 14.4%. Meanwhile, the Nasdaq continued its outperformance trend amid the Covid-19 resurgence. Equities in the EU are retracing a portion of yesterday’s steep loss, which was spurred by fears of the mutated Covid-19 strain in the UK and Brexit concerns, while Asian stocks were mostly lower overnight. A broad dollar index is holding above its recent multi-year low and longer-dated Treasuries are flat, with the 10-year yield at 0.93%. Brent crude prices are retreating toward $50 per barrel as OPEC+ considers its supply cut trajectory.
US Pandemic Relief Bill Finally Passes Congress
The House and Senate approved the $900 billion compromise relief package late last night alongside a spending bill to fund the government through the fiscal year, with President Trump set to sign it today. This long-awaited pandemic relief bill features $600 in direct payments to individuals (adults and children), which Secretary Mnuchin said yesterday could be sent to bank accounts as early as next week. Additionally, the package includes expanded and extended unemployment benefits of $300 per week through March 14th, $325 billion in support for small businesses, extended eviction moratorium and $25 billion in aid to renters, $15 billion for airlines, and assistance for schools, childcare, and vaccine rollout. The total includes $429 billion in unused funds from the CARES Act and the entire package will be appended to the $1.4 trillion omnibus spending bill that will fund the government through the end of this fiscal year. Both President-Elect Biden and House Speaker Pelosi indicated their belief that more stimulus will be needed next year, particularly given the relatively brief period granted for additional unemployment benefits. The provision to prevent the Fed from restarting any of the five CARES Act lending programs, or create similar ones in the future, had become the main sticking point last week once the two most controversial elements, direct funding for state and local governments and liability protections for businesses, had been omitted. While GOP Senators asserted that the provision would exclusively target the five Fed programs, Democrats accused Republicans of trying to hamstring the incoming Biden administration and limiting the ability of the Federal Reserve to respond to economic distress in the future. The final version of the bill is said to narrow the restriction on the Fed to identically reproducing the CARES Act programs, thereby allowing novel formulations of Fed emergency lending facilities in the future. – MPP view: Better late than never. And with the Democrats and Republicans both falling short of their two “must-haves” in this bill (state and local government aid, and corporate liability limits, respectively), we expect a resumption of negotiations after the inauguration.
Brexit Negotiation Bog Down in Waning Days Before the Deadline
The pound is extending its decline from recent highs against the dollar and euro as the UK and EU remain deadlocked over the stubborn sticking point of fishing rights, with the deadline looming next Thursday. Having missed yet another artificial deadline on Sunday, Brexit talks remain stalled this morning after the UK’s proposed compromise on fishing rights remained unacceptable to the EU. The pound, which has acted as a barometer for the fortunes of Brexit, at one point yesterday was down nearly 2% versus the dollar and euro, with the latest pandemic developments adding to the pressure, but steadied in later trading as the UK gave more ground on this challenging issue, and analysts note that more concessions may be forthcoming. With a reimposition of total lockdowns in southeast England and freight stoppage between the UK and France as the fraught backdrop, Prime Minister Johnson is reportedly set to decide in the coming days whether to accept EU terms on fishing and other outstanding issues or opt for a no-deal departure from the single market at midnight on December 31st. In the absence of a firm UK decision, however, reports suggest that talks could continue straight up to the deadline. – 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 dwindling. But with both sides seemingly ready to continue talking past the deadline, Brexit may seem, from a market perspective at least, less like an acute shock and more like a chronic condition.
Possible Easing of OPEC+ Output Cuts – Russia gave indications today that it intends to support OPEC+ raising output by 500,000 barrels a day at next month’s meeting. The hike would take place in February, matching the increase already agreed for January. 500,000 barrels is the maximum monthly incremental supply hike allowed by the cartel’s agreement in early December. OPEC+ shifted their schedule to monthly meetings in order to be able to adjust their production more rapidly to changes in the market. The new stance from Russia came after Brent crude had already dropped toward $50 a barrel due to the UK implementing a new full lockdown in London and southeast England to combat a more contagious strain of Covid-19 that is spreading rapidly. Furthermore, a host of nations around the globe limited travel to and from the UK. Brent fell 2.9% today. – MPP view: Like stocks, oil prices have been in a transition phase as traders try to look past the dire near-term outlook to the post-vaccine demand surge. As we had expected, the latest OPEC boost provided short-term support to prices, and US stimulus expectations seem to have given some additional lift, with rising tensions (and increasing incidents) in the Gulf and dollar weakness adding to the upside impetus. Still, we have expected the dismal demand dynamics of the coming quarters to keep prices capped and see OPEC+ commitment to output cuts as difficult to maintain in the coming months. Today’s development is aligned with our base case expectation that oil prices will have a hard time making significant headway from here.
Traders Eye Georgia Runoffs – Market commentators are noting options activity in the Treasury market in anticipation of the two Senate runoff elections scheduled for January 5th, though early and mail-in balloting is well underway with a reported 1.5 million votes already cast. For context, traders would expect to see longer-dated Treasury yields jump and the dollar slump in the event of a Democrat sweep of the two contests, which would deliver control of the Senate and facilitate a far more expansionary fiscal stance in the first time of the incoming Biden administration. Betting lines and a popular prediction market are reflecting odds of the Republicans achieving at least a split in the two races and retaining Senate control at over 70%. – MPP view: Our base case is aligned with consensus but we expect odds to tighten into polling day on January 5th and investors will not be able to take a GOP win for granted, which will keep longer-dated Treasury yields biased upward and will remain a headwind for the dollar. Though the potential for a Dem sweep might give rise to concerns over taxation at the margin, enthusiasm for a less constrained pro-growth and fiscally stimulative Biden economic program would, we expect, render that result a comfortable net positive for equities.