Stimulus Talks Edging Towards Conclusion

Written by: Craig Erlam | OANDA Europe

Steady gains being seen once again on Wednesday, as we continue to see progress on a variety of downside risk factors going into year-end.

Lawmakers in Congress aren't exactly on the same page, with regards to the kind of stimulus that's needed beyond the end of the year, but one thing they're clearly in agreement on is the essential need for an extension of relief. And one that's tied to funding for government.

The 11 December deadline has just come a little soon, which is why lawmakers will today approve a one week extension in order to give them some extra time to agree on relief measures. For the first time in a while, I'm actually optimistic on a deal before the end of the year now, albeit one that will likely require fresh talks in the new year. The important thing is that it averts the damaging cliff-edge scenario at the end of the year.

Let's just hope that compromise becomes a common theme this month. OPEC+ led the way last week in agreeing terms for gradually paring back emergency production cuts implemented earlier this year. This week we may see some significant movement in the Brexit negotiations as well, as Boris Johnson travels to Brussels for dinner with Ursula von der Leyen.

Negotiators have taken things as far as they can with their given mandates; political compromise was always going to be necessary. This was always going to come in the form of face to face talks between the two leaders, although I'm sure many hoped it wouldn't be quite so late in the day.

The question is what compromises will be made, with the issues remaining being extremely political, even if fishing, for example, is very insignificant in the grand scheme of things. I remain confident that this evening's dinner will break the impasse and allow negotiators to conclude talks in the coming days. If for no other reason than there's just no time left and I don't believe there's any political will for no-deal, regardless of the noise we're hearing on the sidelines once again.

Traders remain optimistic though, although volatility has certainly picked up this last week. The nerves are creeping in and that may ramp up dramatically if talks don't go well this evening. I expect sterling could buckle if the two leaders fail to reconcile their differences this evening. That's not to say they need to work out all the details, but if they leave that dinner claiming that the differences can't be worked out, sterling could take a hammering.

Oil steady after OPEC+ deal

Oil prices are quite steady today, in keeping with how they've traded for most of the week. A lot of good news has been priced into crude at this point, including last week's OPEC+ deal that will see output gradually rising from a lower base from January, ensuring the market won't become flooded with oil as the global economy suffers until the weight of the winter Covid surge.

Recent vaccine news has continued to be supportive for oil prices, with WTI holding above $45 and Brent still flirting with $50. FDA approval for the Pfizer vaccine now looks a given, potentially as early as tomorrow, which will be a major boost, albeit one that it basically priced in at this point. More approvals around the world for this and others though may squeeze a few more drops out of the recovery trade.

Gold seeing pre-ECB/Fed profit taking 

Gold is seeing some profit taking today after a great start to the month. The yellow metal rallied more than 5% as the dollar continued to struggle and stimulus talks progressed. The next week will be very interesting for gold, with the ECB announcing its latest monetary policy decision tomorrow and the Fed doing the same next week. More stimulus is surely on the cards for both, it's just a question of how much with both economies facing an extremely challenging winter. 

The yellow metal forced its way through $1,850, peaking around $1,875, before profit taking kicked in. While the prospects for gold may be good if the Fed and ECB overdeliver, I do wonder if we're going to see a little more downside in the near-term. Gold may have bottomed out for now but we could see some near-term softness, after which it could enjoy some upside once again.

Bitcoin continues to struggle with psychological barrier

Bitcoin is finding life just below $20,000 a lot harder that it appeared it would. While I still have little doubt it will break through this psychological barrier and probably explosively so, it seems we may be made to wait a little longer for it. Volatility has very much returned and even during this consolidation period of recent weeks, there's been some serious whipsaw action. 

A constant reminder of how wild a ride these cryptocurrencies are. I don't think we'll have to wait long for another reminder of the scale of moves they can produce in very little time, with that move looking more likely to come above $20,000 than below $16,000. The latter would arguably be more interesting but much less likely at the moment.

Related: Negotiations into Eleventh Hour