Something Dramatic This Way Comes

You can now toss out whatever expectations you may have had for the news cycle in the week ahead. Following Ruth Bader Ginsburg’s death, it is now all about Donald Trump’s Supreme Court nominee, and you should expect the headlines to reflect that.

Although Susan Collins and Lisa Murkowski are already on the record against confirming a replacement for Ginsburg ahead of the election, Lamar Alexander said Sunday he supports going ahead with the process. That’s a blow to Democrats — Alexander was a possible no. Mitt Romney will likely tip his hand this week.

A Reuters/Ipsos poll released on Sunday showed 62% of Americans believe the vacancy left by Ginsburg should be filled by the winner of the election. As Reuters notes, “five in 10 Republicans agreed that the appointment should wait until after the vote”. That won’t matter for Mitch McConnell and Donald Trump, though. They are poised to move ahead, against what a dying Ginsburg described as her “most fervent wish”.

Read more:

‘My Most Fervent Wish’

What’s Really At Stake In November

Trump is expected to announce his pick this week. “It will be a woman, a very talented, very brilliant woman”, the president told a rally over the weekend.

That means the nominee will be Amy Coney Barrett or Barbara Lagoa. Either could face Kamala Harris in their confirmation hearing, a somewhat daunting prospect, to put it mildly. On Sunday, reports indicated Joe Biden is contemplating sending Harris back to Washington for the occasion.

Although putting the spotlight on his vice presidential nominee in such a contentious setting is risky, Bloomberg correctly notes that it could help Biden by “spark[ing] enthusiasm among young, liberal voters [who] could be inspired seeing Harris defend the legacy of Ginsburg”. Let’s just say I’ve heard worse ideas.

Last week now feels like months ago, but recall that US equities are coming off a third consecutive week of losses. Tech shares remain under siege. Value and small-caps are tracking for their best relative monthly performance in years, as is the equal-weighted S&P.

The world is temporarily “upside down“, although as discussed here Friday, some of that could be longs getting trimmed and shorts covered after books traded through VaR limits during this month’s tech-centric tumult.

The TikTok deal is apparently done, while Trump’s WeChat ban was temporarily blocked by a California judge. This story will continue to play out in the background. Eyes are on Beijing for any sign of retaliatory action related to the US Commerce department’s Friday decree, which still represents a highly aggressive step, judicial intervention in the WeChat shutdown and the reprieve for TikTok pending the Oracle agreement notwithstanding.

Jerome Powell will testify before congressional committees for three consecutive days (bless his heart) starting Tuesday. One imagines he is not looking forward to that experience. Last week’s post-FOMC press conference went fine right up until Powell signaled the committee’s satisfaction with the current run rate and composition of QE. That disappointed markets, which were looking for a nod to WAM extension.

Between that, and a somewhat downbeat (albeit entirely realistic) assessment of the economy, Powell rediscovered his own message from 2012 — namely, that “it will never be enough for the market”. The Fed did, of course, roll out outcome-based forward guidance, but it’s not clear anyone is convinced that average inflation targeting (AIT) is going to succeed.

In addition to doubts around AIT, election jitters (now heightened by the SCOTUS drama) could keep the long-end bid or, at the least, rangebound. “The broader state of the US and global economy/populace adds greater emphasis to the current choices as the electorate heads to the ballot (mail?) box in November”, BMO’s Ian Lyngen said Friday afternoon. “One of the most enduring lessons we took away from 2016 was not to rely heavily on the polls”, he went on to say, noting that “as a result, the prospects for a period of elevated volatility during the next several weeks are difficult to ignore, as are the implications for strengthening the bullish underpinning in the Treasury market”.

As noted here on countless occasions of late, a disputed outcome is now a virtual certainty (i.e., uncertainty is the only certainty), and that’s being reflected in markets. For example, Goldman’s Rocky Fishman notes that options are now reflecting expectations for “an extended period of high volatility”.

“This likely reflects the potential for election results to be finalized with a delay, the potential for an extended equity market reaction to what is currently a competitive race, and the potential for vaccine news around the same time”, Fishman said in a note late last week, adding that “the market appears to expect results of the presidential race will be known by December 8… the ‘safe harbor’ deadline when states with contested races must file results”.

Needless to say, the fight over the SCOTUS vacancy is a factor in this, and will likely to prompt at least some market participants to express concern about the prospects for more social unrest and street protests in the weeks following the vote.

The data calendar stateside is relatively sparse this week, although housing numbers will be watched closely given the possibility that the combination of de-urbanization and record-low mortgage rates have together inflated a new bubble.

In the middle of all this, Nancy Pelosi will need to ensure a stopgap funding bill gets done in order to take a government shutdown off the table. That shouldn’t be a problem.

But, what is worth considering is whether the SCOTUS drama will complicate already fraught negotiations around another virus relief bill. If it was already hard to imagine a scenario where Pelosi and Chuck Schumer come all the way down to $1.5 trillion (the price tag on the “Problem Solvers’” bipartisan compromise bill), it’s even more difficult in the wake of Ginsburg’s death and associated partisan rancor.

Remember, Pelosi already offered Steve Mnuchin a $1.2 trillion discount off the $3.4 trillion HEORES Act. At the same time, some Senate Republicans are reluctant to go along with any additional fiscal stimulus. Expecting this to get resolved in the fog of the war over the SCOTUS vacancy seems like wishful thinking, although I would note that Trump is likely to keep pushing for the $1.5 trillion compromise bill, as are some moderate House Democrats. In short: There is still hope on that.

The bottom line coming off a tragic weekend for America is that irrespective of the near-term price action in markets, you should steel yourself for the most contentious Beltway battle in recent history. Because that is precisely what’s coming.

As the president would say, “the ratings will be tremendous”. Even as the psychological toll on an already delirious nation will be detrimental indeed.