Monday morning wake up calls

US Congress approves stimulus package

Only masochists or the blindly ambitious look forward to early Monday wake-up calls, but that’s what is being delivered to financial markets this morning. The long-awaited USD900 billion follow-on stimulus package in the United States was finally agreed overnight and should pass through Congress and the President’s hands at lightning speed today. The USD1.4 trillion funding bill for the US government was also agreed.

Unfortunately, that positive news (although the actual numbers involved leave me somewhat underwhelmed), is being overshadowed by Covid-19 headlines. The return of the virus to Sydney in Australia casts a pall over local markets and the currency today. But it is the emergence of a more contagious version of Covid-19 in the United Kingdom that has spooked markets. As the country struggles under record daily case numbers, the new strain has prompted European countries to close borders with Britain, although I am consistently surprised that people “need” to travel anyway. Meanwhile, the UK government imposed another tier of restrictions on South-East England.

Brexit trade deal talks remain stalled over the weekend, with time running out to approve a deal through by both sides before December 31st. Combined with European border closures and the UK Health Secretary using phrases such as “out of control” to describe the new strain, Sterling is, unsurprisingly, under pressure today, having fallen 160 points to 1.3360 as I write.

Although the new strain does not appear more virulent, its greater ease of transmission has spooked markets, coming after vaccine distribution delays in the United States. Markets have adopted a light at the end of the tunnel approach since Pfizer and Moderna’s vaccines burst onto the stage. However, the weekend’s events have delivered an unceremonious Monday morning wake-up call that negotiating Q1 of 2021 could be a torturous affair.

Although markets have a decidedly rush to safety look about them today, the US dollar and precious metals have risen, while equities and oil are falling. The scale of the reversal is modest compared to the scope of the moves in the underlying trend. Falls by equities are likely to dips to buy into, and with another USD900 billion of US government debt slapped onto the books over the weekend, the US dollar is unlikely to sustain gains. Once the markets have finished panicking and unwinding recent speculative positioning, the fundamentals of lower for more extended monetary policy, and the search for yield in a zero per cent world, will quickly reassert themselves. Additionally, large directional moves in Asia on a Monday morning, more often than not, are usually red herrings, with an ironic nod to UK-EU Brexit negotiations. This thesis’s only risk is if the more contagious strain of Covid-19 proves to be vaccine-resistant. Then all bets would be off. That does not appear to be the case at this time, though.

In other news, China left its one and three-year Loan Prime Rates unchanged this morning. The rate decision was as expected, with the PBOC maintaining a moderately tight stance as it works through targetted deleveraging of specific sectors of China’s economy. The next move for China rates is likely to be up, but before you all get excited, that is unlikely to happen until late 2021.

With the week shortened by the Christmas holidays, China’s LPR was the weeks highlight for the region. The calendar is similarly bereft for Europe this week. Most attention will focus on the US, with a packed calendar of releases before Friday’s holiday. Tomorrow sees Final GDP for Q3, released, likely to be old news in the context of 2021, as will the Core PCE prices for Q3. Wednesday’s Core PCE for November, New Home Sales and Michigan Consumer Sentiment for December will garner more attention. The week’s highlights though will be Thursday’s Durable Goods and particularly, US Initial Jobless Claims which are expected to rise back above 900,000 for the week. Markets will be hoping that Covid-19’s rampage has not dampened the US recovery but will be fearing that it has. Any fall-out will be mollified by the passing of the fiscal stimulus package agreed yesterday though.

The US fiscal package scope highlights the weak negotiating position that the Democrats have, having failed to gain control of the US Senate in the November election. The Democrat’s election performance was poor yet again, highlighting the challenges they will now have ahead enacting their legislative agenda. It also highlights just how vital Georgia’s double Senate-seat seat run-off is to both sides in early January. That is likely to be a story for next week though, with Covid-19 grabbing the pre-Christmas headlines.

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