US equities careened about in choppy trading on Thursday, before ultimately closing sharply lower amid the worst Brexit jitters in months, D.C. gridlock, and uninspiring labor market data, which together did little to calm frayed nerves.
As expected, Senate Democrats blocked Mitch McConnell’s “skinny” stimulus bill. The legislation was little more than a political publicity stunt. Sporting a price tag of just ~$600 billion, the package was around half of what The White House offered Democrats in a compromise proposal, and just a quarter of Nancy Pelosi’s lowest (and final) offer to Steve Mnuchin. In other words, McConnell’s bill was not serious. One might even call it cynical.
“If past is prologue, there’s actually a significant chance that the public heat on many Republican senators as they go back home will have them come to their senses, and they’ll start negotiating with us in a serious way”, Chuck Schumer said.
I have doubts. After all, Pelosi and Mnuchin have agreed to a “clean” stopgap funding bill that averts a government shutdown, which means the argument that the broader funding discussion would serve as a kind of “deadline” or constraint on stimulus brinksmanship no longer holds.
McConnell’s bill did include an extension of the $300/week federal unemployment supplement currently funded by money diverted from disaster relief under Donald Trump’s executive orders signed last month. As detailed here on Thursday, that funding is already running dry for some states, even as others haven’t even begun to disburse their allocations.
Make no mistake, Mitch knew it had no chance. It fell short on aid for state and local governments, contained no additional stimulus checks, and included what Democrats derided as “poison pills” including tax credits for private schools.
“Part of the narrative had been equity performance and any budding optimism was based on the assumption that another bailout from Washington was an inevitability”, BMO’s rates team said, in a late Thursday note, on the way to suggesting that “the political complexities offered by the Presidential election made a stimulus stalemate more likely than not [and] we struggle with the notion that the market is retaining hope that another deal of substance is a foregone conclusion”.
In other words, there’s now considerable doubt around the idea that market participants were, in fact, baking in additional stimulus and that those expectations were driving domestic equities higher in late August. Indeed, we now know that at least part of stocks’ buoyancy was attributable to the self-feeding dynamics created by voracious appetite for upside optionality in tech shares and the associated hedging flows.
Meanwhile, the EU gave Boris Johnson until the end of this month to clean up the mess he made in the course of scheming to alter the Brexit divorce deal in apparent violation of international law. That deep-sixed the pound, which dove the most since March.
The pound’s losses against the euro were even steeper. EURGBP rose more than 2% at one juncture, as the single currency benefited from the ECB’s decision to avoid coming out too aggressively against euro strength at the September meeting.
This engendered a tug-of-war dynamic for the dollar, which fell as the euro surged during Christine Lagarde’s press conference, then recovered as the pound plunged on the EU’s deadline for Johnson.
“It feels like few are ready for a USD rally, and I could easily envision this Brexit escalation being the catalyst for a sustained move lower in the pound, that by extension, drags other currencies lower”, former equity derivatives trader Kevin Muir said Thursday, noting that he was selling into the EUR rally.
Suffice to say a stronger dollar is just about the last thing a struggling equity market wants to see, as it would entail tighter financial conditions.
Risk sentiment deteriorated in the final hour of US trading, as stocks erased some of the gains logged during Wednesday’s buy-the-dip session. One bank’s sentiment indicator shows risk aversion is once again the order of the day.
“The SG Risk sentiment indicator is now dipping into risk-averse territory”, SocGen’s Sandrine Ungari wrote, in a quick note on Thursday, adding that it “stayed in extreme risk aversion for more than two weeks in March”. That had never happened previously.
The indicator, which is a normalized average of several variables, “then saw the fastest ever transition from extreme risk-off to extreme risk-on”, Ungari went on to say, noting that the gauge remained in risk-on territory for a record five months. The driver of the most recent swoon (orange in the figure) is equity volatility.
In keeping with the risk-off tone in US markets, Treasurys ended up paring early losses as stocks fell. That, despite another day of heavy IG issuance and a large 30-year sale. “In the context of a market facing growing auction sizes, the post takedown flattening rally is telling and speaks to the prudence of the buying the dip associated with new Treasury supply”, BMO’s Ian Lyngen remarked.
Oh, and US mortgage rates fell to a record low 2.86%.
So, if you’re thinking about joining the “urban exodus”, this is an opportune time to start a new, totally unexciting life in the suburbs.