Dollars, Stalemates, And Magic Lines

The week started with a deadline and ended with finger pointing.

“We could do that before the election if the president wants to,” Nancy Pelosi told MSNBC Friday, referencing the ever elusive fourth virus relief package. Trump “has to talk to Senate Republicans,” she added.

A deal between Pelosi and Steve Mnuchin seemed imminent as late as Thursday, with both sides expressing optimism around a package worth some $2 trillion. Mitch McConnell and other Senate GOPers, however, indicated that even if a bill were drafted, blessed by Trump, and pushed through the House, its chances of becoming law were slim. Democrats blocked what they called a cynical bid by McConnell to resurrect a “targeted” relief bill from September, deriding it as a “sham.”

For his part, Trump insisted he could bring reluctant Republicans on board, but there was scant evidence to support the president’s claim. Richard Shelby, for example, said the chances of a deal were “slim” on Friday afternoon, just before the closing bell on Wall Street.

Mark Meadows held out hope, saying the door is open to a deal “in the next day or so,” noting that Pelosi and Mnuchin are “making adjustments and trying to look at language to reach a compromise.” Speaking at The White House, Mnuchin told reporters Pelosi was “dug in,” but added that if Trump sees the “right” deal, he’s going to do it. “If she wants to compromise, there will be a deal,” Mnuchin said, of Pelosi.

All of this frustrated equities, which might have preferred to coast into the weekend on a more upbeat note than they ultimately did. The S&P fell for the first week in four. Essentially, we’re stalled, pending new information both on stimulus and, of course, the election.

The Beltway stalemate put the brakes on the steepening impulse in rates. Treasurys bull flattened into the weekend, snapping a five-session steepening streak in the 5s30s, which came into Friday at the widest since December of 2016.

Yields were 0.2 to 3bps richer out the curve. “In the week ahead, the biggest question for the Treasury market will be whether the recent repricing toward higher yields has staying power,” BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill wrote Friday afternoon. “It’s the next seven to 10 trading sessions that will prove the most meaningful in determining where 10-year yields end 2020,” they added, noting that if rates stay near current levels “into (and out of) a smooth election process,” the stage could be set for 10s to make a run at 1%.

On the other hand, BMO cautions that “should a mean-reverting bid associated with month-end or an unforeseen data disappointment emerge, then a departure point of 55-65bp in 10s implies a 1-handle will be a monumental task given the array of headwinds facing the global economic recovery.” Even after Friday’s small rally, 10-year yields were ~8bp higher for the week. The 200-day moving average was breached.

The steepening curve is a boon for banks, and it’s worth noting that the regional bank ETF broke through its own 200-day moving average recently.

Former head of equity derivatives at RBC Kevin Muir calls that “the most important chart in the world right now.”

“Although I have my reservations about the health of this economy, and by extension the banks, the truth of the matter is that they are cheap, and government officials are determined to make conditions as beneficial as possible for financial institutions,” Kevin wrote this week. “Even though all the bond bulls are desperate for the Fed to peg the yield curve, this would be a death blow for the banks [and] senior officials understand this.”

I’d quibble only on the latter point. Kevin is Canadian, and maybe up north senior officials are competent. But the idea that “senior officials” in the US “understand” anything (anything at all) is debatable. I jest. Sort of. The Fed is semi-competent, especially by comparison to other US government “officials.”

Anyway, the dollar had its worst week since July. The generic narrative is just that the market is concerned about structural issues (e.g., the “twin deficit”) and the prospect of rampant government spending set against a Fed glued to the ZLB in what might as well be perpetuity.

And yet, note that foreign issuers have sold a record amount of USD debt in 2020.

As Bloomberg noted on Friday, overseas borrowers sold some $1.3 trillion in USD obligations through October 21, in a bid to secure the only kind of funding that really matters in a crisis.

Enda Curran and Finbarr Flynn write that “just as happened in the wake of the global financial meltdown [in] 2008, the dollar is cementing its role as the world’s dominant currency even as unilateralist policies from President Trump rile allies and rivals alike.”

The problem with this is simple: It undermines whatever monetary sovereignty the borrowers may have had. When you borrow in a currency you don’t print, you tempt fate. But for many issuers — emerging markets, for instance — there’s little choice, especially when the Fed has made it easy to access dollar liquidity.

Should Trump be reelected and continue to aggressively weaponize the US banking system and leverage the dollar’s reserve status, the decision to borrow heavily in the currency could be seen as a mistake in hindsight, even as it was necessary this year to help stabilize a fragile global financial system during the pandemic.

Incidentally (or not), the lira is now riding its worst weekly losing streak in two decades, after an ill-advised (if entirely predictable) decision by the central bank to eschew another rate hike, opting instead to tweak the rate corridor, underscoring the notion that no matter what Murat Uysal “should” be doing, he is limited by Erdogan’s legendary aversion to higher rates.

As I put it here late last month when seemingly every EM strategist on the planet was busy celebrating Uysal’s “shocking” rate hike and the purported read-through for CBT independence, “if you think for a second that Erdogan cares what anybody thinks or that this wasn’t merely an unavoidable step taken in the interest of expediency rather than promoting long-term stability, you are sorely mistaken.” Now here we are with TRY pressing up against an 8-handle.

And with that, I’ll leave you to look forward to what I’m sure will be yet another US weekend full of stimulus banter and wild political rhetoric all aimed at influencing the most consequential election in modern history.