US fiscal stimulus back in focus as Trump threatens veto

Market Update

US equity futures took a knock during the overnight session as US President Trump unexpectedly announced that he would veto the recently passed Covid-19 fiscal stimulus package unless Congress got rid of “unnecessary components” and raised the stimulus payment amount being sent out to each American to $2000 from $600. The Democrats have already said that they are willing to raise the stimulus payment amount. Whether the Democrats will be willing to axe unnecessary components is another question. Meanwhile, there is no indication yet from the Republicans that they will accept the President’s demands for tweaks to the package.

Fox reporter Program explained that Congress would have to amend and approve a new stimulus package and get it on the President’s desk today to avoid any chance that the President could use a “pocket veto” – A pocket veto is where the President opts not to sign a bill if it comes too close to the end of Congressional adjournment. Note that once a bill has been sent to the President to sign, he/she has ten days to either veto or sign, else it automatically goes into law. Thus, if Congress fails to get the new bill to Trump by today, he could the next 10 days (excluding Sundays) to “run down the clock” to the end of the Congressional session, and veto the bill right at the end of this window, effectively making it impossible for the bill to pass during this Congressional session.

Obviously if Trump does opt to delay stimulus like this, it does present a downside risk to stocks and other risk assets. However, market commentators and analysts have pointed out that President-elect Biden is almost guaranteed to sign any stimulus bill that comes onto his desk, so markets will be getting the stimulus they so crave at least by the end of January.

As such, US equity index futures have recovered back into the green, with S&P 500 futures trading up by about 0.2% in the 3680s, up from overnight lows in the 3650s. European equities are also in the green (Stoxx 600 +0.3%), aided also by the news that freight travel between the UK and mainland Europe has restarted, limiting any further supply chain disruptions.

Meanwhile, crude oil markets are flat on the day, though WTI is back above $47.00, with the complex looking to halt a two-day skid amid ongoing demand concerns given the worsening Covid-19 situation in Europe and following last night’s surprise API crude oil inventory build. Precious metals are subdued with spot gold flat around $1860 and spot silver a little higher having rebounded from support around $25.00. Industrial metals are also firmer, with metal prices broadly supported by a slightly weaker US dollar; the DXY is down just over 0.2% and trading below 90.50 again.

GBP and Brexit

GBP is the third best G10 performer so far this morning, with GBPUSD hitting highs of the day just under 1.3450 and remaining supported above the 1.3400 level. The Brexit situation remains as difficult to track as ever. The general list of how things are going right now seem to be that 1) gaps still remain (UK Housing Secretary Jenrick this morning said there is not yet sufficient progress or a deal PM Johnson believes he can sign up to and the Irish PM said the gap is still wide on fish) but 2) the furious pace if negotiations continues, with EU Commission President von der Leyen and UK PM Boris Johnson reportedly set to hold calls today and tomorrow.

A sky reported that the EU believes that if a deal can be reached on fish, then other issues such as level playing field and governance ought to be “automatically resolved”. So the feeling amongst market participants remains that there is a deal right there for the taking as long as there is the political will to make these final tough decisions. Whether there will be enough political will is of course still a big unknown. The only deadline that matter is the 31^st of December, when the UK and EU are officially thrown onto WTO trading terms.

Meanwhile, GBP seems to have shrugged off further lockdown concerns for the time being. The Telegraph reported last night that many more parts of the country could face tier 4 lockdown restrictions from Boxing Day, with an announcement on the matter likely today. It could be argued that GBP is yet to fully price in the prospect of the UK sliding back into a full national lockdown in Q1 2021, so there could be some downside risks here. Any moves might be exacerbated by thin, holiday conditions.