Trump Refuses To Ve-toe The Line | Daily Market Commentary with Jeffrey Halley
President Trump has been relatively quiet of late by his own lofty standards. But he has thrown markets a curveball this morning by threatening to veto the fiscal stimulus bill that has passed through both houses of Congress. The President has stated that direct payments to families are too low and has suggested to Congress that it tries again. In particular, he appears to be riling against the foreign aid allotments and a number of other pork-barrel giveaways buried in the 5,600-page document. Further complicating the issue, is that the $1.4 trillion government funding bill for 2021 is attached to the legislation. If the President does veto the bill, the government will shut down effectively on the 28th of December.
A 2/3rds majority vote in favour of the bill by both the Senate and the House of Representatives can override the Presidential veto, if that is the course of action President Trump chooses. Overriding the veto is a relatively rare event in American politics though, and it threatens to add another layer over ambiguity as traders and investors prepared for the holiday season.
The market reaction in Asia has been surprisingly muted with most of the regions stock markets remaining in the green, even as US index futures sink this morning. Asia’s first reaction appears to be that President Trump is bluffing, or that even if Trump veto’s the fiscal stimulus, Congress will act quickly with the necessary votes. Given that many Congressional representatives have probably already left Washington DC for the holidays, that could be complacent. For now, markets appear to be holding of pressing the sell button until the situation clarifies.
Asia’s calendar is relatively quiet, with just Thailand’s rate decision and Singapore inflation to relieve the monotony. The Bank of Thailand will almost keep rates unchanged at 0.50% but may note its displeasure with the Baht’s appreciation. Singapore inflation will remain modestly negative, around 0.20% as consumer demand remains muted, and the rising currency pushes down import prices. That is unlikely to change until the end of Q1 2021.
After disappointing US house price data overnight, the US releases a plethora of important data this evening. Initial Jobless Claims could spike above 900,000 for the week, with Durable Goods expected to retreat to 0.60%. Personal Spending is expected to fall 0.40% for November, slightly better than October. Overall, the picture will be one of COvid-19 impacting domestic demand and jobs, although manufacturing remains robust, much as it has in Europe. The fallout should be modest, but if the President exercises the veto, sentiment on financial markets could turn sharply negative. That is likely to result in falling equities and US Dollar strength.
Asian equities shrug of veto concerns.
US markets had a mixed day as Apple rallied strongly, lifting the Nasdaq to a 0.51% gain. Covid-19 fears weighed heavily elsewhere though, with the S&P 500 eased 0.21%, and the Dow Jones falling 0.67%. In Asia, futures on all three indexes have fallen after the Trump veto headlines, with the Dow Jones and S&P 500 e-minis down 0.40%, while Nasdaq futures are 0.10% lower. My overriding impression is that US equity investors are seeking safety in the tried and true 2020 tech strategy, at the expense of more traditional sectors over the holiday period.
Somewhat surprisingly to the author, Asian equity markets are mostly green today, ignoring the Presidential veto threats weighing on US equity futures. The Nikkei has risen a modest 0.15%, with the Kospi climbing 0.70%, perhaps reflecting its tech-heavy nature. Mainland China’s Shanghai Composite has increased strongly by 0.60%, with the CSI 300 up 0.35%. The PBOC CNY 100 bio liquidity injection this morning via the reverse repo may be contributing to the brighter start from China equities. Hong Kong is just 0.10% higher thus far.
Across the region, Singapore is down 0.05%, with Kuala Lumpur higher by 0.45% and Jakarta down 1.20%, after an overnight cabinet reshuffle and increasing movement restrictions by the government over the holiday period. Thailand is 0.45% lower as its struggle to contain its latest Covid-19, which is sapping sentiment, notably in its beleaguered tourism sector. Australian markets have shrugged of veto fears, the ASX 200 and All Ordinaries rising 0.55%.
Although the tone is generally upbeat in Asia, with the region appearing to believe President Trump is bluffing, if the President does veto the fiscal bill, and US data disappoints tonight, the combination could see equities having their Christmas stolen tomorrow.
Risk aversion continues to support the US Dollar.
An air of caution continues to pervade currency markets ahead of the holidays, and as liquidity falls sharply. Covid-19 fears saw the US Dollar rise again overnight, with the dollar index rising 0.69% to 90.65. The index has fallen to 90.48 in Asia, which leaves it parked smack in the middle of its one-month range of 89.75 and 91.25.
Regional Asian currencies are unchanged across the board today, after a steady PBOC CNY fixing at 6.5558. This morning, most US Dollar weakness is reflected in the major currencies, with the EUR, AUD, GBP and JPY all higher by around 0.20% versus the greenback. The price action looks mostly corrective after a night of impressive Dollar strength.
With liquidity falling into the holiday period, currency markets are likely to become much jumpier and more susceptible to headline surprises. With so much economic recovery good news priced into currency markets, the Dollar strength side of the equation is likely to be the path of least resistance over the holiday period.
Sterling continues to lead currency markets on the volatility front, driven by international border closures and the ongoing Brexit trade talks. With only eight days left to find a path forward, time is rapidly running out. Currency markets continue to price in Brexit trade deal success. Failure, combined with low holiday liquidity, could make for emotional times ahead for Sterling long positioning.
Sterling’s is likely to trade quickly to 1.2500 in the event of a Brexit failure. Until then, playing the 1.3200 to 1.3500 range continues to be the preferred strategy if one insists on being engaged at all. The 1.3100 region is the critical long-term support level for GBP/USD, containing the 100-day moving average (DMA) and a multi-month supporting trend-line. A daily close below 1.3100 will be an ominous technical development.
Oil’s retreat continues.
The repricing of the Covid-19 reality in the world continued unabated in oil markets overnight, with US API Crude Inventories showing a surprise climb, and adding to the gloom. Brent crude fell through $50.00 a barrel, finishing 2.0% lower at $49.80. WTI fell 2.25% to $46.75 a barrel.
Both contracts are in retreat in Asia, in contrast to the positivity seen in equity and forex markets. Both contracts have fallen another 1.0% in Asian trading, leaving both Brent crude and WTI precariously perched on support levels for the week.
Brent crude is trading at $49.30 a barrel, just above support at $49.20 a barrel. Failure opens up further losses to $48.00 a barrel and then critical support in the $47.00 a barrel region. A failure of $47.00 implies that oil’s two-month rally has run its course and a deeper correction is likely.
WTI is trading at $46.25 a barrel, its lows for the week. A move through $45.75 a barrel implies more profound losses to $45.00 a barrel initially, ahead of critical support at $44.00 a barrel. As with Brent crude, a loss of $44.00 a barrel implies that WTI’s two-month rally has come to an end.
Gold’s choppy range-trading continues.
Gold continues to trade noisily in a wide 80-dollar range, with risk aversion fears supporting price dips, and a stronger US dollar capping upside gains. Overnight, gold fell 0.88% to $1860.00 an ounce, leaving it mid-range for the week. Today in Asia, it has partially reclaimed those losses, rising 0.25% to $1865.00 an ounce.
Gold choppy range trading is set to continue as moves in other asset markets buffet it and as liquidity falls into the holiday period. From a technical perspective, gold is bookended by its 200 and 100-day moving averages at $1820.00 and $1901.00 an ounce respectively. Investors should probably content themselves to play the range until more clarity returns to markets. Gold will remain vulnerable to aggressive selloffs on US equity markets; should they occur. In the bigger picture, gold’s structural low at $1760.00 an ounce remains intact.