Daily Market Color October 9, 2020Stimulus Hopes Push Equities Higher Stimulus talks continue to drive the market, pushing equities higher. There continues to be a divergence of opinion on the size and scope of the next stimulus package, and markets are hoping for a bipartisan compromise. Equities rose to a five-week high — the S&P 500 and DJIA closed 0.8% and 0.4% higher. Treasury yields and swap rates closed rangebound across the curve — the 10-year closed flat at 0.78%. UST yields are trading 1-2 bps lower across the curve this morning. Congress resumes negotiations on smaller stimulus package. After President Trump tweeted in support of a smaller bill specifically for the airline industry and households, Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi resumed talks. With Democrats still in support of a larger package with a wide reach, Pelosi added she will not compromise on a bill for the airline industry until the White House promises to address other stimulus items as well, commenting, “it can be part of a big bill or it could be separate from a big bill from a timing standpoint, but there won’t be anything unless we crush the virus, put money in the pockets of the American people.” The Fed could boost its asset purchases in the future. Chicago Fed President Charles Evans thinks the central bank has “the capacity to do more asset purchases.” The Fed could either increase its bond-buying or ease policy to skew its purchases to longer-term assets, but with long-term rates already low, Evans believes the bank will not have to act soon. New York Fed President John Williams agrees with Evans, but added the Fed is buying “an extremely high level of assets already” at $120 billion a month. FX Friday. The US dollar renewed its weakness trend this week, continuing a decline that accelerated at the beginning of the month. News that a stimulus deal may be back in the picture and a re-affirmation by the Fed that low interest rate policy will remain in place for the foreseeable future, are all factors attributing to the dollar’s weakness in the face of a global pandemic-induced recession, where safe-haven currencies traditionally are expected to strengthen. Upcoming political uncertainty with the election next month and a potential for the market to refocus its concerns to the US’s growing current account deficit, are downward pressures on the dollar in the next few months and into 2021. The dollar sell-off is having a stabilizing effect in Europe and the UK, even as economic and political woes continue. In the UK, GDP growth registered at 2.1% for the month of August, about 50% lower than predicted. However, GBP/USD appears to have stabilized around the 1.295 mark. In Europe, rising Covid cases are worrying markets of risks of a second-wave and re-shuttering of the economy, but that sentiment was counterbalanced by the renewed US stimulus hopes and some green shoots in the form of strong Italian industrial output in August.
