Summary and Price Action Rundown
Global risk assets are attempting to stabilize this morning, as investors ponder the ramifications of a potential Covid-19 resurgence and grapple with heightened US policy and political uncertainty. S&P 500 futures point to a 0.1% higher open after the index sank 1.2% yesterday, retracing most of its gains since late July and paring its year-to-date upside to 1.6%, which is 8.4% below early September’s record high. The tech-heavy Nasdaq outperformed, as renewed Covid-19 concerns gave a lift to tech and other “stay at home” stocks, holding year-to-date gains at over 20%. Equities in the EU are rebounding but Asian stocks retreated overnight. A broad dollar index is finding support from safe haven demand just above its recent 28-month low, while longer-dated Treasury yields are stable, with the 10-year yield at 0.67%. Brent crude prices are staging a moderate rebound toward $42 per barrel after supply jitters hit prices.
Coronavirus Resurgence Risk in Focus
Amid the confluence of headwinds on US equities, including signs of economic backsliding, dwindling prospects for more fiscal support, rising US political risk, and lingering uncertainty over Fed policy, investors are also pondering the potential for a second wave of Covid-19 this fall. US stocks extended their recent downside yesterday, which is taking them roughly 10% below the recent peaks, a magnitude of decline that fits the classic definition of a correction. High-flying tech stocks, which were among the winners of the pandemic, had been leading the declines but also staged a notable intraday rebound yesterday. Since early September, the outlook for these “stay-at-home” stocks, such as Netflix, Apple, Amazon, and Zoom, has been challenged by the potential for a vaccine announcement over the coming months, which might serve to undermine their advantage. However, the risk of a Covid-19 resurgence in the fall, highlighted by the accelerating second wave outbreaks in the EU and UK, may now limit their downside, particularly relative to rest of the index. For context, the UK government is expected to announce a significant reimposition of Covid-19 containment measures today amid a spike in new cases, focusing on bars and restaurants. This comes as some of the more optimistic timelines for rollout of a viable vaccine have begun to fall by the wayside.
Powell and Mnuchin Set to Testify
After last week’s FOMC decision was met with an uninspiring market reaction and political developments appear to have undermined the remaining chance of a fiscal stimulus bill, Fed Chair Powell and Treasury Secretary Mnuchin may face some pointed questions in their appearance before the House Financial Services panel. Chair Powell’s prepared remarks echo his oft repeated calls for more fiscal stimulus to support the recovery, which he had reiterated last week in his post-decision press conference. However, lawmakers are expected to quiz him on the Fed’s Main Street Lending and Municipal Lending Facility programs, which have been seeded by significant fiscal outlays of $110 billion but have been under scrutiny for lack of uptake. For context, the Main Street Lending Program (MSLP) has only utilized $1.5 billion of the possible $600 billion allocation, and only one loan has been made under the $500 billion Municipal Lending Facility (MLF) scheme. Chair Powell noted last week that the MSLP is in the process of being recalibrated in an effort to increase its useability, but has sought to deflect blame for the inertia by indicating that demand for loans may be low in this uncertain economic environment and that federal grants are more appropriate, an argument repeated in his prepared testimony. Meanwhile, Secretary Mnuchin is likely to be pressed on the amount of stimulus that the administration deems appropriate for this potential next round, given President Trump’s vague endorsement last week of “higher numbers” for the stimulus package. For his part, Secretary Mnuchin last Monday urged action on economic stimulus during an appearance on CNBC and said “now is not the time” to be concerned over the size of the deficit.
Prospect of Libyan Supply Hits Oil – Yesterday, oil prices were roiled by the prospect of a measure in détente in Libya that could see a significant portion of that country’s potential output coming back into global markets. Russian-backed warlord Khalifa Haftar announced that he would lift his blockade on certain portions of the country’s oil infrastructure. Libya has capacity of up to 1.1 million barrels per day but analysts expect only half to return by year-end.
Government Funding Negotiations in the Spotlight – With political rancor deepening over the fight to replace Justice Ginsburg, the odds of agreement on a stimulus bill have dwindled and the prospect of a clear path to an agreement on funding the government past month-end has been clouded as well. House Democrats released their spending bill yesterday, which pushes the deadline out past the election to December 11th, but in keeping with the rising partisan passions in Washington DC, strips out $30 billion in farm aid sought by Congressional Republicans and the White House. Senate Majority Leader McConnell decried the omission but did not indicate he would block a vote on the bill, which is likely to pass the House today.