Market Reports

Summary and Price Action Rundown

Global risk assets are struggling for direction again this morning as the recent rally pauses amid key corporate earnings reports and lingering political and policy uncertainty. S&P 500 futures point to a flat open after the index declined 0.6% yesterday, paring its year-to-date gain to 8.7%, which is 1.9% below early September’s record high. Equities in the EU and Asia were mixed overnight. The dollar is stabilizing near multi-year lows while longer-dated Treasury yields continue to slip below multi-month highs, with the 10-year yield at 0.72%. Brent crude prices remain choppy above $42 per barrel as demand concerns remain a headwind.

Earnings Reporting Season Continues with Reports from US Megabanks

Corporate earnings reporting season kicked off in earnest yesterday, as upside surprises from key US megabanks failed to impress investors. Yesterday, JPMorgan and Citigroup kicked off the third quarter earnings season as both US megabanks topped earnings and revenue expectations, but their stocks closed lower amid lack of upside catalysts for the coming quarters. JPMorgan reported an earnings-per-share (EPS) value of $2.92, topping consensus projections by $0.73 and recording a 9% increase from Q3 2019. Revenues totaled to $29.15 billion, a 3% decline from one year ago. JPMorgan saw significant total trading growth of 30% as investment banking revenue rose 12% to $2.1 billion, the fixed income division’s revenues surged 29%, and equities were up by 32%. Importantly, credit loss provisions rose by only $611 million, falling well short of the $2.88 billion forecast and a trivial comparison to the $10.47 billion injection during the second quarter. The move suggests that the bank may be projecting less-than-expected loan defaults moving forward. The increased trading revenues, lower provisions, and healthy deposit growth all offset lower-than-expected revenues from net interest income (NII), which has struggled to yield healthy revenues in the low interest rate environment. Citigroup reported earnings of $1.40 and revenue of $17.3 billion, and also saw its growth driven by higher trading volume and lower credit loss provisions. Fixed income trading activity increased 18% from last year, and equity trading grew by 15%. Citigroup added just $314 million to credit loss reserves, compared to $5.6 billion last quarter. The bank’s initiative to expand branches in the US proved fruitful last quarter, with North America-based deposits climbing 19%. In other reports yesterday, Delta Airlines reported a quarterly net loss of nearly $5.4 billion and reiterated the continued presence of industry shortfalls. Travel demand remains about 70% below the same time last year, and the carrier said it would delay the purchase of aircraft to better suit its outlook. Today, Bank of America, US Bancorp, Wells Fargo, and Goldman Sachs report earnings, with Morgan Stanley issuing its results tomorrow.

UK Backs Away from Brexit Bluff

The pound is stabilizing this morning after reports have indicated that Prime Minister Johnson will not abruptly pull out from Brexit negotiations with the EU at his self-imposed deadline of tomorrow to secure a deal. Citing an unnamed source, the articles suggest that the UK government will continue to negotiate over the coming days and will likely reassess their progress after the EU leaders’ summit. PM Johnson and European Commission President von der Leyen are scheduled to speak today, though no breakthroughs are expected. EU negotiators and leaders, including German Chancellor Merkel, emphasize that key hurdles remain and consensus is insufficient for terms to be considered at the upcoming EU leaders’ summit, which begins tomorrow. PM Johnson has employed brinksmanship in his Brexit negotiations to decent effect and has signaled that he is prepared to take the UK into a no-deal Brexit at year-end. The UK pound, which has served as a barometer for the fortunes of Brexit, is rangebound against the weakening dollar but is hovering barely above five-year lows versus the euro, suggesting a disparity of leverage in these negotiations. Fishing rights remain a key sticking point, along with treatment of Northern Ireland and UK business subsidies.

Additional Themes

Fate of Fiscal Stimulus Hinges on US Election – Yesterday, Majority Leader McConnell indicated that he is preparing a Senate vote next week on another “skinny” stimulus package, this time focused on replenishment of the Payroll Protection Program (PPP), which disburses funds to small businesses. House Speaker Pelosi predictably rejected this approach, while President Trump tweeted “Go big or go home!!!” in response. For context, President Trump announced last Tuesday that he was pulling out of stimulus talks after weeks of prevarication, and then abruptly pivoted to offer a $1.8 trillion deal last Friday, to which the reception has been cool.

Snags in Covid Treatment Trials – Markets were rattled yesterday by a surprise announcement from Johnson & Johnson indicating that a patient in its vaccine trial had become unexpectedly sick, causing a halt to the testing program for the time being. Shares of the pharma giant fell 2.3%. This came ahead of today’s announcement that Eli Lilly’s vaccine trial is also on hold now over health concerns, which sent its shares 0.8% lower in pre-market trading. Such pauses are considered typical in drug trials, and AstraZeneca’s trial was delayed in early September after a subject fell ill. Analysts continue to ponder the outlook for a vaccine, with the base case roughly approximating a partially effective vaccine by next spring.

Summary and Price Action Rundown

Global risk assets are muted and mixed this morning as their recent rally pauses amid the start of key corporate earnings reports. S&P 500 futures indicate a flat open after the index advanced 1.6% yesterday in low-volume holiday trading, upping its year-to-date gain to 9.4%, which is 1.3% below early September’s record high. Equities in the EU and Asia were mixed overnight. The dollar is stabilizing near multi-year lows while longer-dated Treasury yields are edging lower from multi-month highs, with the 10-year yield at 0.76%. Brent crude prices remain choppy above $42 per barrel as demand concerns remain a headwind.

Earnings Reporting Season Begins

TCorporate earnings reporting season kicks off in earnest this week, with muted expectations and relatively low investor attention. Third quarter (Q3) earnings season begins this week with big banks at the outset, where credit adequacy will again be the primary focus. Companies have offered scant insight into earnings expectations thus far, with only 69 of the S&P 500 companies issuing any sort of earnings-per-share (EPS) guidance for the quarter, falling well below the five-year running average of 104 companies reporting per quarter. Of the 69 companies, 46 issued positive earnings expectations while 23 expect negative results. Heading into the first week of reports, analysts have positively adjusted earnings-growth projections by nearly 5% from estimates at the beginning of the quarter. Currently, Q3 earnings are estimated to decline by 20.5%, and if this value should register as the actual decline for the quarter, it will mark the second largest year-over-year decline in earnings reported by the index since Q2 2009, only trailing the previous quarter’s -31.6% figure. The estimated revenue decline also improved during the quarter from -5.4% to -3.5% after net upward revisions to estimates during the quarter. Most notably, the Q3 bottom-up EPS estimate, which aggregates the median EPS estimates for all S&P 500 constituents, increased by 4.1% from June 30^th to September 30^th.

Stimulus Expectations Center on Post-Election Action

The widening polling lead for Joe Biden in recent weeks is raising investor hopes for a clean and clear election outcome and also focusing attention on the prospects for a $3+ trillion fiscal stimulus package early next year if Democrats sweep the White House, Senate, and House of Representatives. Despite widespread skepticism over the accuracy of polling, particularly in the wake of the high-profile failures to predict the outcomes of the 2016 US election and the Brexit vote, the now roughly double digit national lead for Biden and his narrower but consistent advantage in nearly every consequential swing state are affording investors a moderately greater degree of clarity going into polling. This is being reflected not only in the current US equity rally but diminishing bets on stock market volatility around the election, with level of VIX futures in the coming months moderating significantly over the past week. For context, the primary risk around this election for investors is that of a drawn out and disorderly dispute to declare a winner of the presidential contest and any clear-cut result would likely be met with relief. Meanwhile, President Trump looks unlikely to get a stimulus bill agreed prior to the election despite backpedaling on his pronouncement a week ago that he was unilaterally suspending negotiations with House Democrats over the draft package. The White House has since pivoted to offer a $1.8 trillion deal last Friday, though the reception from both Republican and Democratic leaders on Capitol Hill has been cool.

Additional Themes

German Economic Sentiment Wilts – In September, the ZEW survey of economic sentiment retreated unexpectedly to a five-month low of 56.1, dramatically missing estimates of 72.0 and reversing the optimism of August’s 77.4 reading, which was the highest since May 2000. This comes amid a resurgence of Covid-19 in parts of Germany and elsewhere in the EU. Meanwhile, the Bundesbank’s Financial Stability Review, which was published today, warned that the “effects of the real economic crisis have not yet fully arrived in the German financial system” and that insolvencies would continue to rise amid the persistence of the pandemic.

Mixed Chinese Trade Data – In September, the pace of China’s export growth undershot estimates of 10.5% year-on-year (y/y), printing 8.7%, which is down from 11.6% in August. Meanwhile, imports handily topped expectations, rising 11.6% y/y versus a forecast of 1.0% and -0.5% the prior month. The resulting trade surplus is at its narrowest level since March. Analysts are pondering the outlook for export recovery amid the ongoing impact of the Covid-19 pandemic in the rest of the world, which surging imports reflect China’s domestic rebound.

Summary and Price Action Rundown

Global risk assets are extending their recent rally this morning as investors continue to pin their hopes on the prospects for more fiscal and monetary stimulus after the November election. S&P 500 futures point to a 0.5% higher open after the index advanced 0.8% yesterday, upping its year-to-date gain to 6.7%, which is 3.7% below early September’s record high. Equities in the EU and Asia were mixed overnight. As investors continue to assess the outlook for policy stimulus, the dollar is sinking lower while longer-dated Treasury yields are fluctuating near multi-month highs, with the 10-year yield at 0.77%. Brent crude prices remain choppy around $43 per barrel amid crosscurrents in the demand outlook and another Gulf hurricane.

Brightening Post-Election Stimulus Prospects Buoy Market Spirits

The strong likelihood of a pandemic relief deal after the election, and potentially a $3 trillion package in the event of a Democrat sweep of both houses of Congress and the White House, is supporting investor sentiment despite yesterday’s disappointment over airline stimulus. Yesterday, House Speaker Pelosi dampened expectations of near-term completion of a standalone relief deal for airlines after discussions with Treasury Secretary Mnuchin over recent days failed to bear fruit. In line with her previous negotiating position, she rejected even this limited foray into a piecemeal approach at stimulus, stating “there is no standalone bill without a bigger bill.” With the polls reflecting an increasingly lead for Joe Biden, analysts do not expect Speaker Pelosi to offer significant concessions to the White House on their current $2.2 trillion offer, though she indicated that she remains “at the table.” Meanwhile, the White House is signaling renewed appetite for a comprehensive deal, but there is no indication that they are set to up their offer in order to bridge the gap between their roughly $1.6 trillion position and the House Democrats’ higher figure, with the amount of state aid remaining a particular sticking point. Amid the wrangling over this round of stimulus, however, investors do not expect to have to wait long for a deal to pass. If President Trump secures a second term, House Democrats will likely make the necessary compromise to get a bill through before year-end and if Biden emerges victorious, he may sign a stimulus bill upwards of $3 trillion if Democrats capture the Senate as well (more below).

Tentative Ebbing of US Political Risk

With investors focused primarily on the risk of a narrow and disputed election result, leading to weeks or months of uncertainty amid recounts, litigation, and civic unrest, the widening lead for Biden over the past week is raising hopes for a clean and clear outcome. Despite widespread skepticism over the accuracy of polling, particularly in the wake of the high-profile failures to predict the outcomes of the 2016 US election and the Brexit vote, the now roughly double digit national lead for Biden and his narrower but consistent advantage in nearly every consequential swing state are affording investors a moderately greater degree of clarity going into polling. Indications from key House and Senate races raise the possibility of a Democrat sweep, which would yield a significantly more aggressive approach to fiscal stimulus, though analysts note promised tax increases on corporations and the wealthy as well as a more proactive overall regulatory environment under the Democrats as offsetting factors. Though the polls indicate a rising likelihood of a clear-cut election result, the political atmosphere remains tense and volatility futures continue to reflect expectations for elevated turbulence into and around the election date of November 3^rd. News yesterday that President Trump is declining to participate in the upcoming second presidential debate due to its virtual format, alongside the worrisome developments in Michigan, are keeping the political temperature elevated.

Additional Themes

Oil Prices Fluctuate as Another Hurricane Barrels Through the Gulf – Like Hurricane Laura in late August, Hurricane Delta is picking up strength as it approaches landfall on the gulf coast, requiring the shutdown of exposed energy facilities, like drilling rigs and refineries in its path. Category 4 Hurricane Laura, which was stronger than Delta is now at Category 3, spared the gulf energy infrastructure and resulted in only fleeting upside in oil prices. Despite the cloudy demand outlook and worsening supply dynamics, oil prices have remained broadly rangebound for months, with the weakening dollar providing key support.

Looking Ahead – Next week features a busy market calendar, with the unofficial start of third quarter (Q3) corporate earnings reporting season kicking off with US mega-banks on Tuesday. Companies have thus far offered scant insight into earnings expectations, with only 67 of the S&P 500 companies issuing any sort of guidance for the quarter (45 positive and 22 negative), which falls well below the five-year running average of 106 companies. On the upside, analysts have positively revised Q3 estimates from the beginning of the quarter, with earnings expected to decline by 21% and revenue by 3.6% compared to projections of -25.3% and -5.4%, respectively, on June 30^th. US September retail sales and industrial production are also due, alongside inflation figures.

Summary and Price Action Rundown

Global risk assets are extending yesterday’s rebound this morning as investors refocus on the prospects for more fiscal and monetary stimulus after the November election. S&P 500 futures indicate a 0.5% higher open after the index jumped 1.7% yesterday, erasing Tuesday’s downside and upping its year-to-date gain to 5.8%, which is 4.5% below early September’s record high. Equities in the EU and Asia were broadly higher overnight. As investors continue to assess the outlook for policy stimulus, the dollar is slightly lower while longer-dated Treasury yields fluctuating near multi-month highs, with the 10-year yield at 0.77%. Brent crude prices remain choppy, jumping back toward $43 per barrel amid crosscurrents in the demand outlook.

Investors Recalibrate Expectations for Fiscal Stimulus

Amid President Trump’s public vacillation on pandemic relief negotiations as he attempts to recover from the coronavirus, investors are setting their sights on the prospect of even greater fiscal support after the election. Yesterday, US equities recouped their losses from Tuesday’s rollercoaster session, with traditional economy stocks leading to the upside, while the dollar weakened and longer-dated Treasury yields sold off, a pattern that suggests rising expectations for more fiscal stimulus, though consensus is shifting to a post-election deal. President Trump has publicly vacillated over the pandemic relief bill, again reversing his stance yesterday just hours after publicly announcing his decision on Tuesday to cancel talks with Democratic leadership until after the November 3^rd election. Specifically, the President again took to Twitter yesterday morning to convey his readiness to sign standalone bills for provisions such as direct stimulus checks and an extension of PPP, particularly for the airlines industry which is facing upwards of 32,000 furloughs. Though President Trump’s most recent swerve is in a more stimulus-friendly direction, Speaker Pelosi is unlikely to make any near-term concessions to the White House in pursuit of a deal given Joe Biden’s increasing lead in the polls and Democrats are rejecting this piecemeal approach, as they have done repeatedly throughout this negotiation. Still, the prospects look favorable for specific airline industry aid, which Speaker Pelosi has endorsed and was the subject of discussion with Treasury Secretary Mnuchin yesterday, with further talks expected today. With regard to the broader deal, investors are increasingly focused on the prospects of an agreement following the election. In the case of a Trump victory, the House Democrats will likely accede to something like the $1.5 trillion version currently being supported by the White House, and if Joe Biden wins, the swing factor would be the Senate, with a Dem sweep pointing to passage of a considerably upsized package of roughly $3 trillion by early next year (more below).

Fed Communications Put Additional Easing in Focus

With investors pondering whether the FOMC might enact more aggressive easing in pursuit of their newly revised and more ambitious inflation and employment targets, the minutes kindled anticipation of more asset purchases. The September FOMC Meeting Minutes were released yesterday, highlighting that Fed officials see rates remaining at the 0-0.25% range through at least 2023 based on the current outlook, in pursuit of the revised policy targets: labor-market conditions achieve maximum employment, with a particular focus on lower-income segments, inflation reaches 2%, and inflation is on track to moderately exceed 2% for some period of time. So far, Fed officials have not specifically clarified what timeframe will be used to gauge the latter condition, though they have emphasized the approach is not anchored to a mechanical model and will maintain some measure of flexibility. The minutes also showed there was further discussion on the Fed’s asset purchase program, noting “that in future meetings it would be appropriate to further assess and communicate how the Committee’s asset purchase program could best support” its objectives. The Fed is currently purchasing $80 billion of US Treasuries and $40 billion in mortgage backed securities monthly. Market participants are also noting a study by a top Fed economist advocating the increasing use of asset purchases for monetary easing when interest rates are at the zero lower bound.

Additional Themes

Veep Debate Remains Orderly – With the polls showing Joe Biden extending his lead over President Trump, the stakes for last night’s Vice Presidential debate were high for both sides. With neither candidate landing a knockout blow, analysts suggest that the proceeding are unlikely to alter the dynamics of the race, which appear to be moving increasingly in favor of Joe Biden. Recent polling suggests Biden holds a nearly double-digit lead over Trump nationwide, is ahead in nearly most crucial swing states by varying degrees.

Weekly Jobless Claims Due – With key support like the Paycheck Protection Program rolling off, economists are bracing for an abrupt readjustment in US labor markets over the coming months. Nevertheless, new filing for the week ending October 3^rd are expected to remain broadly steady at 820K. For context, initial jobless claims rose by 837K in the week ending September 26^th, slightly below market forecasts of 850K and a decline from the prior week’s upwardly revised 873K figure. The reading marked the fifth consecutive week claims remained in the 800K’s territory, suggesting the labor market recovery remains stagnant as government support continues to wane.

Summary and Price Action Rundown

Global risk assets are rebounding this morning after yesterday’s swoon as investors struggle for clarity on the US political and policy outlook amid mixed messages from President Trump over the pandemic relief negotiations. S&P 500 futures point to a 0.7% higher open after the index lost 1.4% yesterday on the President’s apparent pullout from stimulus talks. The late afternoon decline erased solid intraday upside and cut the S&P 500’s year-to-date gain to 4.0%, which is more than 6% below early September’s record high. Equities in the EU and Asia were gently mixed overnight. Amid garbled messaging on the fiscal stimulus front, the dollar is steady while longer-dated Treasury yields are turning higher, with the 10-year yield at 0.78%. Brent crude prices remain choppy, falling back below $42 per barrel ahead of US stockpile data.

President Trump Sends Conflicting Signals on Stimulus

Yesterday, in his first full day back at the White House following his recent hospital stay for Covid-19 treatment, President Trump halted negotiations with House Democrats over the pandemic relief bill and then took to Twitter to push piecemeal stimulus measures. After apparently pulling out from negotiations yesterday afternoon, President Trump sent a barrage of tweets calling for House Democrats to offer support for airlines, renewed funding for the Paycheck Protection Program (PPP), and $1,200 stimulus checks for individuals. Analysts are awaiting a response from Speaker Pelosi, but House Democrats have refused similar White House offers of segmenting relief measures over a series of bills. For context, President Trump yesterday announced over Twitter his rejection of the recently passed $2.2 trillion stimulus package from the House and halted further negotiations until after the November election. He concluded his tweet with upbeat messaging on the economy and a call for the Senate to prioritize confirmation of Amy Coney Barrett to the Supreme Court. Both the S&P 500 and the Nasdaq dropped 2% from their intraday highs after the announcement as investors’ recently rising hopes for further near-term economic support from the government were extinguished. President Trump’s decision seemed to contrast with his tweet from Walter Reed hospital on Saturday in which he stated that the economy “wants & needs stimulus” and pushed for both sides to “work together” toward swift agreement on a package. The newfound push over the weekend from both sides on the stimulus followed the grim announcements from both American Airlines and United Airlines of nearly 32,000 upcoming furloughs between the two companies absent direct government stimulus. Speaker Pelosi has issued statements to both airlines assuring that relief will come either in the standalone form of Rep. DeFazio’s (D-OR)  bill, which extends Paycheck Protection Program (PPP) to the airlines for six months, or as part of the comprehensive package still to be agreed upon.

Fed Minutes to Provide Additional Insight as Monetary Stimulus Bets Rise

The spotlight now shifts back to the Fed, as recent communications indicate that their already downbeat economic projections had assumed additional fiscal support. The minutes from the September FOMC meeting, which are being released today, are expected to feature some incremental details regarding the Fed’s revised interest rate projections with its new and more ambitious inflation targeting and full employment mandates. However, attention is already shifting to the potential for additional stimulus, likely in the form of augmented asset purchases, after the apparent breakdown in negotiations between the White House and House Democrats over the pandemic relief bill. In a speech yesterday, Fed Chair Powell redoubled his calls for more fiscal stimulus to shore up the recovery, stating that fiscal and monetary policy responses have so far underpinned a “strong but incomplete recovery in demand,” and emphasized that the Fed’s current economic outlook assumes additional government support measures. His strong and continued advocacy of more fiscal spending has been echoed almost unanimously by the other members of the FOMC.

Additional Themes

US Political Uncertainty in Focus Ahead of Veep Debate – With the polls showing Joe Biden extending his lead over President Trump, the stakes for tonight’s Vice Presidential debate are high for both sides. Lingering health concerns and the Covid-19 containment measures on display in the debate will amplify the tension in the venue, particularly given the news in recent days that more White House staff are testing positive for the virus.

House Democrats Push Big Tech Antitrust – The House Antitrust Subcommittee issued a report yesterday recommending a sweeping new approach to regulating the US IT giants that it describes as “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons” with “too much power.” Recommendations included limits on the areas of business in which each company can operate, which could require a breakup of the giants. Amazon, Apple, Facebook, and Google shares underperformed yesterday, though not dramatically, and are broadly positive again this morning, suggesting that investors remain broadly unconcerned over these ongoing inquiries into anticompetitive practices by these firms.

Summary and Price Action Rundown

Global risk assets are mixed this morning after yesterday’s rally as investors struggle to gain greater clarity on the US political and policy outlook. S&P 500 futures indicate a 0.2% lower open after the index soared 1.8% yesterday, lifting its year-to-date gain to 5.5%, which is less than 5% below early September’s record high. Equities in the EU and Asia were gently mixed overnight. After yesterday’s burst of optimism on the fiscal stimulus front sharply weakened the dollar and hoisted longer-dated Treasury yields, both are settling down this morning, with the 10-year yield at 0.77%. Brent crude prices are continuing to recover a portion of last week’s steep downtrend, bouncing back toward $42 per barrel.

Tentative Easing of US Political Uncertainty

President Trump’s return to the White House from Walter Reed hospital last night has somewhat moderated US political uncertainty, as an increasing number of analysts suggest that recent development may be adding a degree of clarity to the political and policy outlook. As concerns over a worst-case health outcome for the president have eased, the focus has shifted to the ramification for the election. For context, the locus of US political risk centers on the prospect of a tight presidential race leading to a lengthy, litigated, and disorderly dispute over the outcome. Now, with investors generally assuming that the West Wing Covid cluster will prove to be a meaningful setback to President Trump’s reelection odds, and a WSJ/NBC poll released over the weekend showing Joe Biden extending his lead following Tuesday’s debate, there has been an incremental shift toward expectations of a clear-cut Biden victory and perhaps even a Democrat sweep. Though some analysts are focused on the potential for higher taxes under a Biden administration and Democrat-led Congress, the prospect for significantly augmented fiscal spending in such a scenario is seen as a stimulative counterbalance. 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. The next major campaign event is tomorrow’s Vice Presidential debate, which is scheduled to take place despite safety concerns.

Fed Communications in Focus

Chair Powell is set to speak this morning ahead of tomorrow’s release of the minutes from the consequential September FOMC meeting. Fed Chair Powell will deliver remarks this morning, kicking off the second day of the National Association for Business Economics’ (NABE) 62nd annual conference. He is expected to continue to make the case for more fiscal stimulus amid a cloudy outlook for the economy and may discuss various aspects of the Fed’s shift to average inflation targeting of 2% and the corresponding interest rate projections that were revealed at last month’s FOMC meeting. The minutes of those proceedings will be released tomorrow and they will be closely parsed for any additional insights on the thinking behind the new policy formulation. For context, analysts have been focused on the areas of ambiguity such as the approximate length of time over which the Fed would be averaging the inflation figures, what degree of price pressure over 2% they would be willing to accept, and how the Fed would react to backsliding away from its targets with interest rates already pinned at the zero lower bound. In his speech yesterday at the NABE Conference, Chicago Fed President Evans took an aggressive stance, stressing that overshooting the 2% inflation target is critical and that “the FOMC needs to have an ‘in it to win it’ attitude toward our inflation objective.”

Additional Themes

Pelosi and Mnuchin Set to Meet on Stimulus – With persistent gaps remaining between the House Democrats’ $2.2 trillion version of the next round of pandemic relief spending, which they passed last Thursday, and the roughly $1.5 trillion package supported by the White House, face-to-face talks between House Speaker Pelosi and Treasury Secretary Mnuchin are set to take place today. This morning, Speaker Pelosi reportedly characterized the negotiations as going “very slowly.” 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” but did not offer any compromise to break the deadlock. Even if the two sides were to agree, the Senate might pose a final obstacle to bill, given that Majority Leader McConnell has warned that he will only bring a vote to the floor if a majority of his Republican caucus supports it.

ECB President Lagarde Talks Stimulus – In an interview with the Wall Street Journal, European Central Bank (ECB) President Lagarde reiterated her warnings about the durability of the EU economic recovery amid pockets of Covid-19 resurgence. She emphasized that the ECB stood ready to “use all the tools,” including interest rates and asset purchases, to counter the risk of a double-dip recession. Recently, ECB officials, including President Lagarde, have focused on the strength of the euro as a headwind in their reflationary efforts. The euro is flat this morning following Lagarde’s remarks but remains near more than two-year highs versus the dollar.

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 19^th 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.

Additional Themes

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 15^th 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.

Summary and Price Action Rundown

Global risk assets are retreating this morning as news that President Trump has contracted Covid-19 compounds investor concerns over the outlook for US politics and policy. S&P 500 futures indicate a 1.6% lower open after the index closed 0.5% higher yesterday, upping its year-to-date gain to 4.6%, which is about 5.5% below early September’s record high. Equities in the EU are also down, while Asian markets were mixed amid widespread holiday closures. Demand for safe haven assets is providing modest support for the dollar, while longer-dated Treasury yields are also reflecting rising demand, with the 10-year yield at 0.66%. Brent crude prices are extending this week’s steep downtrend, falling below $40 per barrel.

Political Uncertainty Intensifies Following President Trump’s Covid-19 Diagnosis

In an already fraught election season, last evening’s news that President Trump, the First Lady, and a key White House staffer have tested positive for the coronavirus has deepened investor anxieties over the political and policy outlook. Financial markets are reflecting heightened risk aversion following the news overnight from Washington, as investors grapple with the potential ramifications of these developments. The key area of uncertainty is of course the election, with President Trump off the campaign trail for a few weeks at a minimum and only a month to go before Americans go to the polls. Joe Biden and his team will certainly need to release their Covid-19 testing status as soon as practicable, and the likelihood of one or more follow-up debates to this week’s first installment have clearly declined. Meanwhile, analysts are pondering whether the slim prospects of the fiscal stimulus package have been impacted in any way, as House Speaker Pelosi and Treasury Secretary Mnuchin had been making halting progress toward a compromise over the last few days (more below). Similarly, some commentators now expect that the process of confirming Amy Coney Barrett to the Supreme Court is more likely to be delayed until after the election. On the economics front, there is speculation that the President’s high-profile infection will underscore the high transmissibility and continued virulence of Covid-19 to the general public, a view that is congruent with the pre-market selloffs in airline, travel, and other equity sectors that are adversely impacted by coronavirus concerns. Lastly, analysts are bracing for a lack of transparency from the White House over President Trump’s ongoing condition, citing the example that the severity of UK Prime Minister Johnson’s illness with coronavirus was not disclosed until after his recovery.

US Nonfarm Payrolls Due

Amid heightened uncertainty over the prospects for the US economic recovery, today’s key September labor market data is expected to remain robust. 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. Other US economic data this week has been mixed, with August personal income surprising to the downside, while personal spending and inflation for that month was perkier than estimated, and the manufacturing purchasing managers’ index for September remained in robustly expansionary territory.

Additional Themes

Slim Fiscal Stimulus Hopes – Effort to forge a compromise stimulus package are expected to continue today despite the President’s diagnosis, as House Democrats and the White House remain at odds over remaining gaps, particularly the amount of state aid and degree of unemployment benefit augmentation. The House passed the Democrat-drafted $2.2 trillion version of the bill last night, which was expected to be the final step before a month-long recess, though Speaker Pelosi has indicated that talks will continue today.

Looking Ahead – With investor attention affixed on the US political and policy situation, the President’s health, and market volatility, next week’s relatively light economic calendar is likely to garner only modest notice. The minutes of the Fed’s September meeting have the greatest potential to move markets, to the extent they provide additional insight on the announced policy and forecast shifts. Global service sector purchasing managers’ indexes (PMIs) for September are due as well, alongside another week of US jobless claims data, a gauge of small business optimism, and a decision by the Reserve Bank of Australia.