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Stimulus hopes overpower virus surge, Brexit adventure continues


    • Wall Street powers to fresh record highs as US stimulus deal draws closer
    • Vaccine news lifts spirits too, dollar slips as haven demand fades
    • Sterling all over the place as Boris Johnson heads to Brussels
    • BoC policy decision on the agenda today – not much expected

Christmas rally arrives early

The stock market freight train keeps on rolling. Hopes that Congress will soon inject the world’s biggest economy with another dose of fiscal stimulus eclipsed a worrisome spike in new US coronavirus cases on Tuesday, catapulting Wall Street to new all-time highs. There hasn’t been any real breakthrough in the stimulus talks, but it does appear that both sides are prepared to pour water in their wine and soften their demands.

The Republicans insist on a ‘liability protection’ mechanism to shield businesses from covid-related lawsuits, whereas the Democrats want more funding for state and local governments. Additionally, the Republicans are willing to send a $600 check to all Americans but want to pay for that by eliminating the extra unemployment benefits, which is a red line for Democrats.

As always, there is bound to be a lengthy negotiation and some political theater until a compromise is found, but the market is growing confident that a deal is coming as the relentless spread of the virus has introduced a sense of urgency in Congress. Some positive headlines around the AstraZeneca and Pfizer vaccines helped the mood as well.

Currencies relatively quiet, all eyes on Brexit

Things are calmer in the FX spectrum. There is a feeling of mild optimism running through the currency arena too, with the defensive dollar back on the retreat and risk-linked currencies like the aussie powering to new highs, but most pairs are relatively contained.

The British pound continues to steal the spotlight, with the currency turning into the financial equivalent of a pinball machine lately amid a series of conflicting headlines around Brexit that introduced some chaos in the market. The UK agreed to withdraw the controversial law-breaking clauses in its Internal Markets Bill yesterday, in what was likely an ‘olive branch’ move to show it is negotiating in good faith.

But a few moments later, those gains evaporated amid reports that the chief EU negotiator now thinks the chances of a deal are ‘very slim’. Prime Minister Johnson will travel to Brussels today to meet with the EU Commission chief at 19:00 GMT in an attempt to breathe life into the stalled talks. The pound’s fortunes hang on the outcome of this meeting.

Despite all the cautious rhetoric lately, a deal still seems like the most likely outcome. The UK clearly thinks there is a deal to be done here and is trying to appease the EU, while there is also the economic angle to consider. Neither side can ‘afford’ a no-deal exit with their economies already staring into the lockdown abyss. In other words, the ultimate direction for sterling still seems higher, even though it is likely to be a stormy ride.

BoC unlikely to rock the boat

The other main event today will be the Bank of Canada policy decision. No action is expected, though there is some scope for a slightly more optimistic message. Since the BoC’s previous meeting, economic data have been decent, vaccines were announced, and oil prices surged, painting a brighter picture for Canada’s massive oil industry.

A more upbeat tone would argue for a minor positive reaction in the loonie. In the bigger picture, the currency’s fate depends on how stock markets and oil prices perform. The correlation between the loonie and the S&P 500 is very strong lately, as is the correlation with crude.

XM.COM Review

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-stimulus-hopes-overpower-virus-surge-brexit-adventure-continues-132747
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