Morning Markets Brief 9-29-2020

Summary and Price Action Rundown

Global risk assets are mixed this morning as investors monitor prospects for US fiscal stimulus and await the first presidential debate between President Trump and Joe Biden this evening. S&P 500 futures point to a slightly higher open after the index advanced 1.6% for a second straight session yesterday, upping its year-to-date gain to 3.7%, which is 6.4% below early September’s record high. More traditional equity sectors, like financials, benefitted from hopes for another pandemic relief bill while tech shares also continued their rebound. Equities in the EU and Asia were gently mixed overnight. A broad dollar index is continuing to retrace its recent rebound from 28-month lows, while longer-dated Treasury yields are flat, with the 10-year yield at 0.65%. Brent crude prices continue to hover around $42 per barrel.

Intrigue Continues Over US Fiscal Stimulus Deal

House Democrats unveil their latest draft bill as Speaker Pelosi and Treasury Secretary Mnuchin re-engage over the terms. Renewed hopes of a deal on the stalled pandemic relief package have been supportive for investor risk appetite in recent days, though uncertainty over the outcome remains high. Speaker Pelosi and Secretary Mnuchin spoke by phone last evening shortly after the House Democrats released their revised $2.2 trillion draft, which is intended to be the basis for renewed negotiations with the White House. This version’s inclusion of specific support for airlines, restaurants, and other impacted sectors is tailored to meet the stimulus priorities of the Trump administration, as spelled out by Secretary Mnuchin in his testimony last week before Congress. It also features a nearly 50% reduction in state support funds from the prior version, the $3.4 trillion HEROES Act, to roughly $500 billion. Pelosi and Mnuchin are reportedly set to speak again today in an effort to bridge the remaining gap between the two sides, which is still wide. Secretary Mnuchin signaled earlier this month that the administration would be unwilling to approve any stimulus exceeding $1.5 trillion. Speaker Pelosi has already announced that the House will not go into pre-election recess until it has passed a stimulus package, and sources have indicated that the new legislation could come to a vote on the House floor as early as tomorrow.

US Political Uncertainty Remains in Focus

Ahead of tonight’s first presidential debate, investors continue to ponder the potential for a disorderly and disputed election outcome. This evening, President Trump and Democratic presidential nominee Joe Biden will debate each other for the first time, ahead of the election only 36 days away. Despite a climate of civic unrest fueled by racial justice grievances, coronavirus containment shortfalls and the corresponding economic fallout, and a battle of appointing the next Supreme Court Justice, the election race has surprisingly remained relatively stable. Former VP Biden has continued to lead the President in the polls, though the gap has been narrowing heading into tonight’s event. Some analysts have noted that the President’s public lambasting of Biden’s mental health may have diminished expectations for his performance despite the former VP’s prominent experience in debates. While it is unclear to what extent the debate will move national polls, what is clear is that the election is set to be the most volatile US political season for generations. Futures and options on some currencies and government bonds are showing unusually high premiums around November 3rd and continuing through December, while equity volatility futures (the VIX index) are elevated around the election and for months beyond, suggesting concerns over protracted uncertainty. On the other hand, analysts suggest that a smoother-than-expected election process could spur a relief rally that continues fueling risk asset upside through the end of the year.

Additional Themes

Beijing Monitors Troubled Chinese Property Giant – Shares of Evergrande, the largest issuer of speculative grade dollar bonds in Asia, have rebounded from multi-month lows and the price of its bonds have recouped a portion of their steep losses from Friday amid reports that arrangements with investors may forestall a potential cash crunch early next year. Reports indicate that the magnitude of Evergrande’s borrowings, with an estimated $88 billion and $35 billion in loan and bond liabilities, respectively, have drawn the attention of China’s leadership and the highly leveraged developer is under scrutiny from the government’s financial stability committee, though no policy recommendations have been issued.

China Slows US Goods Buying – Reports overnight indicate that Chinese purchases of US agricultural goods under the Phase One trade deal slowed in August, falling further behind the targets set forth in that agreement. Trump administration officials have generally expressed a favorable assessment of the Phase One accord despite ongoing signs of slippage from benchmarks, with the impact of the coronavirus understandably impacting progress.