Morning Commentary: Whipsaw City: Would You Expect Any Less From 2020?
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Whipsaw City: Would You Expect Any Less From 2020?
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Andrew Kositkun Foreign Exchange Head Trader
The final step to turn the U.S. fiscal stimulus bill passed by Congress into law was for the president to sign it. Given that President Trump’s Treasury secretary was an active part of stimulus negotiations, one would be forgiven for thinking that Trump’s signature would be a formality. Of course, as with nearly everything in 2020, nothing is ever easy. Instead of signing the bill, Trump, via video tweet, demanded that Congress cut “wasteful” spending and increase stimulus checks to $2,000 from $600.
As a result, House Majority Leader Steny Hoyer introduced a bill that sought to replace the $600 payment with $2,000 payments by unanimous consent. This move was blocked by Republicans despite President Trump’s support. Democrats are now expected to try again through a roll call vote on a new bill on Dec. 28 when the House also plans a vote to override Trump’s veto of the National Defense Authorization Act. With funding running out that day, Congress will also have to decide on whether nor not will it pass another stopgap spending measure to avoid a partial government shutdown.
The fiscal stimulus package was intentionally attached to a broader government spending bill needed to avoid a shutdown. The main purpose of tying the two bills together was to increase motivation and urgency to pass stimulus by tying the lack of stimulus to a government shutdown that everyone wants to avoid. The downside is that tying the two bills together makes things more complicated. Case in point, the “wasteful spending” that Trump criticized was predominantly from the government funding bill and not the fiscal stimulus package. Moreover, these were not new programs but existing ones that needed to be funded along with the rest of the government.
The upshot of this last-minute whipsaw is that markets find themselves back in another period of uncertainty ahead of a potential government shutdown on Dec. 28 unless 1) Congress renegotiates and incorporates Trump’s demand (seemingly unlikely); 2) Congress passes another continuing resolution (possible); 3) Trump relents and signs the current bill (most likely); or 4) the government actually goes into shutdown (tail risk with a high impact).
Notably, initial market reaction has been relatively muted. This likely is attributed to the view that the deal will still get done and the view that fiscal stimulus would have a secondary economic impact relative to a new COVID-19 strain that transmits quicker. But this lack of initial response masks the potential for increased volatility relative to the seasonal illiquid volatility that we see during this time of year.
On the Brexit front, negotiators have finalized the trade deal after last-minute snag over the precise number of each fish species EU boats will be able to catch in U.K. waters. The deal now needs to be approved by U.K. Prime Minister Boris Johnson and the EU governments, as well as the parliaments on both sides.
The view remains that the recent rally in the pound reflects a pricing out of the no-deal risk premium. As such, the pound likely moves higher after the Brexit trade deal receives formal approval. However, from there attention is likely to shift toward the fragile state of the U.K. economy and the negative consequences of a Brexit deal. Markets have been focused on the macro deal or no deal, but details matter. Clearly, a deal is better than no deal, but it is likely that there is a bigger difference between a good deal and a bad deal than between a bad deal and no deal. Keep in mind that the two sides agreed to a skinny deal which leaves out a lot. So despite reaching a deal, the expectation is for the pound to be pressured lower as the U.K. will still be faced with material disruptions and a deal that is fundamentally bad relative to when the country was part of the single market.
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