Morning Markets Brief 9-30-2020

Summary and Price Action Rundown

Global risk assets are moving lower again this morning after last evening’s first presidential debate between President Trump and Joe Biden highlighted US political uncertainty, while investors continue to monitor a final push on Capitol Hill to pass a pandemic relief bill. S&P 500 futures indicate a 0.4% lower open after the index slipped 0.5% yesterday, paring its year-to-date gain to 3.2%, which is about 7% below early September’s record high. Equities in the EU and Asia were broadly lower overnight. The dollar is steady near its highest level since early August, while longer-dated Treasury yields are flat, with the 10-year yield at 0.65%. Brent crude prices are extending yesterday’s steep decline, falling below $41 per barrel.

Testy and Chaotic Debate Underscores US Political Risks

The disheartening spectacle of last night’s first presidential debate is highlighting the potential for a disorderly and disputed election outcome. Last evening, President Trump and Democratic presidential nominee Joe Biden met on the debate stage for the first time, with the election only 34 days away and partisan passions running high around the country. Analysts broadly suggest that neither the incumbent nor the challenger scored a decisive victory as substantive political and policy issues were swamped by crosstalk, blather, and invectives. With the polls in former VP Biden’s favor going into the debate, the perceived draw is giving his odds a modest boost in betting markets this morning. Despite a climate of civic unrest fueled by racial justice grievances, coronavirus containment shortfalls and the corresponding economic fallout, and a battle over appointing the next Supreme Court Justice, the election race has remained relatively stable. 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.

US Fiscal Stimulus Talks Down to the Wire

The last-ditch effort to forge a compromise stimulus package culminates over the coming few days with more engagement between House Speaker Pelosi and Treasury Secretary Mnuchin. House Democrats are awaiting the Trump administration’s response to their revised pandemic relief package, which features $2.2 trillion in fiscal support including $1200 stimulus checks, federal unemployment benefits at $600/week through January 2021, $436 billion in state and city aid for budget shortfalls, PPP loans for businesses, and $275 billion for education and childcare. Speaker Pelosi and Secretary Mnuchin spoke both Monday evening and yesterday morning in an effort to negotiate a compromise on the existing gap between this new package and the administration’s current position, which has not been accepting of figures over $1.5 trillion. While the new Democratic bill manages to satisfy Mnuchin’s top priorities of aid to airlines and small businesses, sticking points are likely to include the $600/week benefits and hundreds of billions in state aid that thwarted a deal last time.


Additional Themes

Jobs in the Headlines – This morning’s reading of the ADP private payrolls gauge for September, which precedes Friday’s more closely-followed nonfarm payroll release, is expected to show 649K new jobs versus 428K the prior month. Nonfarm payrolls are projected to show 850K new jobs after the US economy added 1.371 million jobs in August, down from 1.734 million in July, and only slightly below market forecasts of 1.4 million. That left payrolls 11.5 million below pre-pandemic levels as more than 22 million jobs were lost in March and April. This comes amid worrisome headlines on the employment front from Walt Disney, which has announced 28,000 layoffs due to diminished attendance at theme parks, depressed cruise demand, and struggles at retail outlets. Airlines are also poised to begin cutting headcount as government stimulus rolls off this week, with around 40,000 expected to be impacted.

ECB Echoes the Fed on Inflation – After yesterday’s releases of September inflation figures for France and Germany showed notable downside surprises, European Central Bank (ECB) President Lagarde today indicated that the central bank’s current inflation target of “below, but close to, 2%” would be re-examined as part of its ongoing strategic review. In a statement redolent of the Federal Reserve’s recent policy shift, she noted that “the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates.” For context, Germany’s September inflation reading was its lowest since the global deflation scare in early 2015. September’s price gauge for the EU is due on Friday, with estimates showing a rebound. The euro edged lower and a gauge of long-term EU inflation expectations tilted higher today.