Perfect Storm

It wouldn’t be a stretch to say that things “fell apart” on Monday for US markets. “Perfect storm” comes to mind, even as tech managed to claw back losses.

Although election jitters were rampant prior to Ruth Bader Ginsburg’s death, her passing opens the door to a fearsome partisan battle — and so much more. As Alexandria Ocasio-Cortez made clear in remarks delivered in Brooklyn Sunday, an epoch-making election became immeasurably more existential on Friday evening, assuming the existential admits of degrees.

“This is our entire livelihood that could be shaped by the next 60 or so days”, Ocasio-Cortez said.  “Our reproductive rights are on the line. Our labor rights are on the line. Our right to health care is on the line”.

She’s not wrong. And, in separate remarks to The New York Times (which themselves echoed a lengthy Instagram post), Ocasio-Cortez emphasized how tragic it is that Ginsburg’s final days were spent pondering the gravity of her own death for the country she dedicated her life to serving.

“My mind keeps going back to how her final moments were preoccupied with that, not taking stock”, she said, referencing Ginsburg’s “fervent” last wish. “That took away, fundamentally, from her ability to more fully enjoy her life, her accomplishments, her family and her friends – because our democracy is so imperiled”.

While it’s unquestionably true that the acute pain in financials Monday (engendered by an unflattering investigative report on global money laundering) weighed heavily on market sentiment (figure below), the political tension is now almost unbearable.

“The ‘new’ information weighing on domestic equities came in the form of rising COVID case counts in London leading to speculation on lockdown revivals by week’s end and a bank probe related to possible money laundering”, BMO’s rates team said, in an afternoon note, adding this bit of color: “As one astute market professional observed, ‘Really? Money laundering despite all the rules (and all the compliance modules)?’”

I would again suggest that while coronavirus concerns and the “revelation” that banks aren’t always scrupulous were indeed contributing factors to Monday’s malaise, political tumult in Washington played an outsized role in undermining confidence.

There is a very real risk that, over the next two months, the US descends into the closest thing possible to “chaos” for a highly-developed economy. “The stakes couldn’t be higher” is a phrase that’s used often, but rarely meant literally. At this point, it can be taken literally.

Read more: What’s Really At Stake In November

As discussed here at length on Sunday evening, the SCOTUS drama will complicate already fraught negotiations around another virus relief bill, but now there’s another potential problem.

On Monday, Nancy Pelosi moved to float a stopgap funding bill that doesn’t feature tens of billions in key farm aid, which Democrats apparently prefer to include in stimulus talks. That risks a government shutdown, if The White House and the GOP balk.

“House Democrats’ rough draft of a government funding bill shamefully leaves out key relief and support that American farmers need”, Mitch McConnell said. You can trust him on that. After all, Mitch is a man who knows a thing or two about the word “shameful”.

Remember, markets thought the stopgap bill was a done deal after both Pelosi and Steve Mnuchin agreed to pass a “clean” CR. Now, that is in doubt. The House is set to vote this week, leaving it to McConnell to push the legislation through the Senate by the end of the month. If something goes “wrong”, the government may close.

I don’t think I have to say this, but piling a government shutdown atop the failed virus stimulus push and setting the whole thing against the backdrop of a battle for Ginsburg’s vacant SCOTUS seat and what are sure to be cantankerous presidential debates, may be more than a fragile market and a splintered nation can take.

All of this weighed on stocks Monday. Treasurys reacted as you’d expect, bull flattening the 2s10s and the 5s30s. Oil plunged 4%.

“The fight over replacing Justice Ginsburg is negative for financials and housing as it likely derails a Phase 4 stimulus until after the inauguration”, Cowen’s Jaret Seiberg said.

Analysts and politicians are split on who benefits most from the galvanizing effect of Ginsburg’s passing.

“The odds heavily favor President Trump’s next nominee being confirmed later this year”, Compass Point’s Isaac Boltansky said, in a note, adding that according to his contacts in the GOP, this is “positive for the president and the prospects for holding the Senate because it will animate the base and shift focus away from the White House’s coronavirus response”.

Of course, Democrats claim that their base is similarly “animated”, and that nothing can distract from 200,000 Americans dead to the pandemic.

“There is no question that overall, [the] event is more likely to benefit President Trump than Vice President Biden”, Evercore ISI’s Sarah Bianchi said, in a note of her own. “Biden was winning the race and anything that changes the dynamics is better for the candidate who is trying to close the gap”.

KBW’s Brian Gardner may have had the best take. “Ginsburg’s death and the process to replace her adds chaos to an already chaotic election”, he said, before noting that “it might be a wash, as both sides can rally their base during the confirmation process”.

Whatever the case, markets are nervous — and rightfully so. Note that Monday was a “real” risk-off session in another respect. The dollar was bid and gold tumbled, underscoring the notion that when things get dicey, the only haven anyone wants is the greenback, even when the proximate source of the market’s consternation is the US itself.

But really, nobody should be concerned. After all, Larry Kudlow says things are generally fine. The economy is improving and the US is in a “V-shaped” recovery, he insisted on Monday.

As far as the desirability of additional virus relief, Kudlow said the US rebound isn’t contingent on another stimulus bill. The economy, he promised, will continue to improve with or without stimulus.