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Markets little moved by Trumps refusal to sign the stimulus bill

23 December 2020

With less than a month left to go before he leaves the Oval Office, President Trump caught the markets by surprise threatening not to sign a long-debated Covid-19 relief package which took the Congress several months to agree upon. While he did not say he will veto the legislation, Trump demanded an increase in direct payments to Americans from $600 in the current bill to $2,000. 

The $900 billion pandemic relief package that will deliver cash to individuals and businesses along with much-needed resources to vaccinate the country seemed to be a done deal 24 hours ago. Trump’s top administration official Treasury Secretary Mnuchin praised the package on Tuesday, saying it is critical for American workers, families and businesses.

US futures initially fell on the news but were quick to recover, with all three major indices sitting slightly below the flatline at the time of writing. The market reaction reflects the belief that the bill will be amended and signed in a couple of weeks. Alternatively, the Democrats are willing to offer an increase in stimulus cheques in a separate bill.

The new highly contagious coronavirus strain, which first appeared in the UK and canceled Christmas plans for millions, maybe of more considerable risk to sentiment. That depends widely on the trajectory it will take in the coming days and weeks as scientists scramble to fully understand the new variant.  Currently, there are more questions than answers. Will the mutated virus stop vaccines from working? How far will it spread? Is it more deadly? Does it spread more in the younger population? Until we get answers to these questions, it is difficult to know its impact on the economy.

Despite these challenges ahead, there has so far been little demand for the safe haven Dollar on Wednesday. The USD has declined against most major currencies with GBPUSD back above 1.34. The EU and UK have reached the final stages of the negotiations, and with Sterling still hovering around current levels traders are leaning towards a positive outcome for a Brexit deal. Expect conflicting headlines to drive more volatility in Sterling until we get the final result. The magnitude of the downside remains much higher than the upside given what is currently priced in.

In commodity markets, oil is feeling most of the pressure from the new coronavirus variant. Brent has fallen more than 5.5% in three days and is currently trading below $50. If the new strain leads to more lockdowns and travel restrictions, we can see more short-term pain. However, the medium-term outlook relies on the distribution speed and effectiveness of the vaccine. At current price levels it seems most of the positive news has already been baked in and it now requires solid data to support further upside.

Gold is another commodity to keep an eye on as we approach year-end. If asset managers want to book some profits and reduce risk in portfolios, gold is likely to receive some significant inflows in the final days of 2020. Overall, we remain positive on the yellow metal as long as real yields continue trading in negative territory, which is likely to be the scenario in the year ahead. 



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