Stimulus Reality Sinking In

Written by: Craig Erlam | OANDA Europe

Optimism is wearing thin as another day passes and talks are continuing in Washington for much needed stimulus ahead of the election.

Such is the importance of a stimulus package that it's completely overshadowing the election itself with less than two weeks to go. And yet, it's looking increasingly unlikely it's going to happen. Even if Mnuchin and Pelosi can bridge the gap that remains, which is far from guaranteed, there seems a very strong chance the Senate will just reject it anyway.

Perhaps that reality setting in is what's weighing on these markets now. Any delay in support being passed will be damaging for the economic recovery in the US and the task of finding a compromise may not be any easier after the eletion if the Republicans hold the Senate. We could be faced with a damaging delay and smaller stimulus than is being discussed now. 

While the polls are still strongly favouring Biden heading into election day, the Senate is a much closer race so there's still a considerable amount of uncertainty as we approach November 3rd. And that's before you factor in the delays caused by postal voting and the possibility of a contested result. This may weigh on sentiment in the markets over the next couple of weeks.

All eyes will naturally be on the final Presidential debate this evening, although I must say I'm struggling to get too excited about it. The last was such a huge disappointment and while there will be attempts to prevent a repeat of that shambles, I just wonder whether we've heard it all before. I'm not sure what either candidate can offer that's going to have a significant impact. 

Brexit breakthrough possible after petty setback

Brexit talks have officially restarted following a brief spat between London and Brussels, with both sides once again determined to avoid a damaging no-deal in just over two months. While both claim they're prepared for and willing to accept no-deal if the other doesn't compromise, it's quite clear there's no appetite on either side for the outcome and it's nothing more than a bluff in the hope that the other blinks first. Thankfully, with talks restarting, there's finally a real possibility of a breakthrough, at which point we can all move on with our lives.

Lira hits record low as CBRT leaves rates unchanged

The Turkish lira hit a new record low against the dollar on Thursday, after the central bank shocked markets and left rates unchanged. Recent moves by the bank had given the markets the impression they were planning a hefty rate hike today, in the region of 175 basis points, but the CBRT opted instead to leave them on hold, sending the currency tumbling. The central bank claimed it had achieved its aim of tightening financial conditions, essentially sending a signal to the markets that it's not planning any more hikes. Inflationary pressures are likely not going to ease, with the currency down 25% against the greenback this year and still hitting new lows.

Oil gets a reality check

Oil is trading a little higher on Thursday, after pulling back towards the middle of their post summer range over the last couple of sessions. Crude prices had gathered some significant bullish momentum and were testing the upper end of these ranges despite there still being major downside risks. It seems that trade was a little overcrowded and once the profit taking kicked it, it quickly accelerated back to a more reasonable level. The expectation of more stimulus may have driven a certain amount of bullishness, with traders coming back to earth with a bang as the optimism fizzles out.

Momentum with gold bulls, for now

Gold is also suffering a little bit of a hangover from all the unjustified optimism over a stimulus deal. Don't get me wrong, the talks haven't collapsed and an agreement is still possible, but there are still big hurdles to overcome and very little time. A reality check is good for these markets and the prospect of no deal before election day seems to be sinking in. Gold is back around $1,900 so the consolidation continues. Despite the disappointment, the series of higher lows means momentum is still with the bulls and $1,930 is looking a little vulnerable. A break of $1,900 may buck the trend and put some pressure on prices.

Related: McConnell Stimulus Warnings: Markets Awaiting Breakthrough