Markets Optimistic on Stimulus Talks

Written by: Craig Erlam | OANDA Europe

A tentative start to the week with European stock markets a mixed bag and US futures a little higher on slightly improved hopes of a stimulus deal before the election.

There are an unusual number of major risk events occuring in the coming weeks so we may see more of this cautious approach, with investors reacting as and when things unfold. Covid remains a huge downside risk for economies around the world heading into the final months of the year but investors are banking on more positive outcomes elsewhere.

Any small hope of a pre-election Covid vaccine is fading fast but lawmakers on Capitol Hill could give markets a welcome boost if they come to an agreement on much-needed stimulus before November 3rd. Investors are seemingly banking on this meaning a failure to deliver could be a nasty shock for markets over the next couple of weeks.

The numbers are getting a little closer and with Trump over the weekend suggesting he'd favour a number even higher than Pelosi's, a deal between the House and the White House is looking increasingly possible. And while Trump may be confident he can get Senate Republicans on board, there hasn't been anything from Mitch McConnell that inspires the same confidence in me. Hopefully the President can be as persuasive as he believes.

The polls aren't looking particularly favourable for President Trump at the moment and I can't imagine a failure to get a stimulus package over the line will help his chances. His sentiment towards a deal has changed dramatically since calling off talks altogether a couple of weeks ago, so perhaps he agrees. Even with it and a strong performance this Thursday, it will take some turnaround the secure a second term.

Traders remain optimistic on Brexit outcome

Brexit negotiations are unsurprisingly going to the wire, with the UK taking a hard stance on Friday after the two sides failed to find a compromise prior to the EU summit. Both sides are of the belief that the other isn't doing enough, an expected outcome at this stage and one that will likely be resolved in the coming weeks at the last possible moment. To fail to reach an agreement because of something as small as fishing would be outrageous.

We have to look past all the games that are being played and that includes the Internal Market Bill, a clear attempt to put a little extra pressure on Brussels that has little chance of becoming law without changes being made. The Lords will surely debate and make changes this week, paving the way for talks to continue and a deal eventually reached. Sterling traders clearly share my optimism, although that leaves quite a horrific void below if we're all proven wrong. 

Oil may be pricing it postponement of January output increases

Oil is trading a little flat at the start of the week but continuing to hold on at the upper end of its post summer range. That's some going when you consider all of the downside risks that remain but clearly there is a confidence that OPEC+ will act in a way that maintains these prices. 

The JMMC meets today to evaluate the current measures so we won't have to wait too long to see how compliant members are being and whether more is necessary. I doubt members would sign up to new cuts at this juncture but they may be persueded to postpone reducing cuts by two million barrels from January. Perhaps this is what traders are feeling more bullish about. The risks remain firmly tilted to the downside.

Gold stimulated by noises from Capitol Hill

Gold is up around 1% on the day as the dollar pulls back at the start of the week. The greenback is coming off a decent week but it is giving up most of those hard fought gains in early trade. The prospect of a stimulus package being agreed that's in the ballpark of what Pelosi and the Democrats are proposing is probably behind this, with the dollar typically preferred in times of risk aversion.

Still, I don't think this is yet that bullish for gold. A deal is still very much not agreed and there remains a number of major downside risk factors for riskier assets, which is what gold now finds itself aligned with. The yellow metal remains within its ever tightening range, a breakout from which looks likely in the next couple of weeks.

Related: Market Risks Are Piling Up