Stimulus Deal Making Time is Upon Us

Written by: Craig Erlam | OANDA

Stock markets off to a promising start in Europe and Wall Street is poised for small gains as well as negotiations on both sides of the pond see much needed progress.

In both cases, there has been a painful lack of urgency to get a deal done which is why we find ourselves in the situation we are. But with critical deadlines now only days away, negotiations have seemingly become turbocharged and compromises are finally being made which is fueling further optimism in the markets today.

US stimulus talks have been going on for months and while emergency measures have bought some time, it's now almost up. Programs are due to expire at the end of the year and the country is seeing its most severe surge in cases and fatalities since the start of the pandemic. The time for negotiation has passed, it's time for action. 

A meeting of House and Senate majority and minority leaders on Tuesday appeared to go well with both sides appearing optimistic that a deal will be reached. With both wanting to tie a deal to the spending bill - which needs to be signed off by Friday to avoid a partial government shutdown - the prospects for a deal this week look good. They could technically back another temporary funding bill but that looks unlikely at this point.

A narrow path to Brexit deal

Brexit talks continue to make progress on the more contentious issues, most notably level playing field, with Ursula von der Leyen echoing Michel Barnier's view that a narrow path to a deal exists. Ignoring all of the drama for a second, it seems like the progess we've seen this week is significant after Boris Johnson and Ursula von der Leyen agreed to push ahead with negotiations on Sunday, despite previously wanting a deal by then.

We're used to delays and missed deadlines by now so Sunday's decision came as a surprise to no one. It did trigger some nerves late last week as the perceived odds of no-deal increased and sterling stumbled back towards 1.31 against the dollar. It's back above 1.35 this morning and making decent gains on the day as deal optimism returns in force.

While both sides admit fishing remains a massive problem that little progress has been made on, it's impossible to imagine a deal failing on this. Level playing field plays into the fundamentals of the single market for the EU and sovereignty for the UK, making it theoretically a potential deal breaker. Fishing is very political which is probably why it's being left late in the day when final compromises can be struck. A deal this week is very possible, although it is Brexit so let's not get too carried away.

Will Fed follow other central banks with more bond buying?

Away from the political drama in Washington and Brussels, there is one other major market event today. The Federal Reserve will announce its latest monetary policy decision and there's still some debate about whether it will move or not. 

Longer term yields have been rising, the country is in the midst of its most severe phase of the pandemic, more restrictions will take their toll on the economy and Congress is yet to pass a relief bill. What's more, the central bank will be armed with fresh economic projections which will shed light on the outlook against the backdrop of the current situation and recent vaccine developments. Everything is in place for easing, but that doesn't mean they will.

There's been a lot of talk about yield curve control in recent months and while this may be a tool the central bank utilizes in the future, if necessary, it seems unlikely they'll consider it today. So it just becomes a question of whether they opt to buy more bonds or rely on forward guidance to pressure yields. Other central banks have opted for the former but that doesn't mean the Fed will. It would certainly be another positive for stock markets into the end of the year if they do.

Oil running on fumes

Oil is continuing to make steady gains, with Brent moving above $51 to its highest level since March before pulling back. Similarly, WTI came within a whisker of $48 today before paring gains. It seems both are running on fumes after a remarkable run since early November, when we started getting good news on the vaccines, which are now being rolled out in the UK, Canada and US. 

With OPEC+ stepping in earlier this month to restrict new production which had been planned to take place from January, prices have remained supported and the group has committed to remaining reactive going forward which will continue to support crude through a potentially tough few months. 

Gold rallying ahead of Fed

Gold is in positive territory and once again above $1,850, with traders seemingly not shy ahead of the Fed decision. More bond buying should be a positive stimulus for gold, which has struggled in the aftermath of all the vaccine announcements. The dollar has remained under pressure but that's only limited the downside in the yellow metal which seemingly has one eye on the long end of the yield curve.

Should the Fed opt to hold today, it could be nasty for gold, barring some extremely dovish forward guidance. We may not see it break the November lows but it may be headed in that direction. The markets appear to be pricing in some action. Should the Fed deliver then we could see a decent rally and test of $1,900 once more, bringing an end to the post summer correction.

Bitcoin eyeing Fed bump to $20,000

It will be interesting to see how bitcoin responds to the Fed, having rallied strongly into the announcement. There is clearly a view in the community that all of this central bank easing provides a bullish case for bitcoin and with the crypto closing in on new record highs and, importantly, $20,000, this could well be the point when it explodes higher into uncharted territory. It could be a lovely holiday period for bitcoin and the other cryptocurrencies that ride the wave higher.

Related: A Massive Week For Markets