economy

Risky Business

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.

Howdy neighbor.


 

9 comments on “Risky Business

  1. derek says:

    Key parties in the ‘burbs!

  2. Sheldan says:

    Pelosi and Schumer may have made a mistake in blocking the Republican bill. $300 may be a “cynically” small amount, but it’s some badly needed cash for many starving people.

    Also, politically the stonewalling may backfire because it will be easier for Republicans to convince voters that Dems blocked immediate relief than for Democrats to make voters believe they are better off having nothing now in hopes of getting more later.

    • runamok says:

      Frankly, the Rs are very good at fighting and winning elections. But suck at governing (because they want the power only so they can financially loot the country). The Ds seem to be relying on how past public opinion has come down on the inability to pass legislation when government shutdowns are at stake.

      So far, seems to be working for the Ds. After all, if you are living in the Star Motel in Kissimmee, are you really going to blame Ds? Are you even registered to vote? Are you even going to receive your ballot in the mail? Can you afford the stamp to mail it in?

      • Sheldan says:

        You are correct about the people living those horrible Kissimmee motels. But they are a minuscule percentage of the population. I’m thinking about the millions of recently unemployed who well might vote. And they may not care if the government shuts down. – but care very much if they can’t afford to eat or pay rent.

    • Anonymous says:

      I think people are so numb to the political positioning that they almost expect these politicians to blame each other for anything that happens including if the sun rises.

    • I think people are numb to all the blame game.

  3. runamok says:

    Great that rates are low for the second and third tier cities. For the already expensive cities on the coasts, low rates don’t do anything except elevate already expensive housing. Who cares that rates are 1.759853% for a 30 year if you are paying $700 per square foot. Congrats, you are now paying $715.

    I’m glad the 2nd and 3rd tier cities will benefit. Bring jobs to these cities and invigorate their economies, spread the tech jobs around, hopefully. This seems like it will be one of the few, good things that we can expect to have happen from this catastrophe. And, as a third-order effect, perhaps, it will forever change electoral politics in the US.

    Re the UK, Peter Zeihan made a Twitter comment that the EU has not been able to politically coalesce around recent problems, e.g., Ukraine, refugees, banking, stimulus, military/defense, but they coalesced and made it extremely different for one of their own, the UK. (For, afterall, the UK is Europe and European.) If the sledding gets readlly tough for the UK as expected, in 30 years they very well might be a corporate colony of the US.

    • Peter Zeihan has been predicting a great many things, including a global collapse with the United States as the xception because of its geographic, demographic, and economic advantages.

      Six months after the publication of his latest book, Disunited Nations, America’s political and economic systems are beset by instability and unrest much like the rest of the world. Calling Zeihan’s suggestion that America’s built in advantages would always overcome poor leadership and internal divisions into serious question. I guess we will know more after the election, but even if a Biden presidency restores some semblance of normalcy, the level of precarity built into the American economy is likely to prove unsustainable in the long term.

      Zeihan is a self-described global expert who has correctly defined a number of facts and trends and then proceeded to play Nostradamus by projecting. If nothing else that has worked to generate speaking fees and book sales.

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