The Market Today
Congress Passes Stimulus, Funding Bill; U.K. Crisis Worsens
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines – Virus Mutation and Stimulus: As expected, the daily headlines were focused on the new virus strain in the U.K. that has drawn many countries to cut-off travel to and from the island, and Congress’s weekend agreement for more emergency fiscal stimulus. Prior to lawmakers passing a $1.4 trillion omnibus bill to fund the government through September and the recent compromise agreement for $900 billion in additional aid, Spain became the latest major European country to say it would not accept inbound travelers from the U.K. The WHO said there were no signs that the new U.K. variant results in a more severe disease or would not be halted by the current vaccines. The European Medicines Agency (EMA) and the U.K.’s Chief Scientific Adviser agreed, saying the current expectation is that the vaccines will still block COVID-19. BioNTech said it is confident the company’s vaccine will work, but that it will take two weeks to verify. Nonetheless, the U.K.’s outbreak remains a concern with 33k new daily cases significantly outpacing the 7-day average of 27k. On the mainland, Luxembourg imposed a lockdown from December 26 to January 10. More encouragingly, the EMA approved the Pfizer vaccine for use in Europe. The developments in the U.K. have impacted some decisions in the U.S. as New York said inbound flights would require testing and California indicated it was considering mandatory quarantine for visitors from the region. California continues to struggle with the ongoing outbreak despite 98% of the state’s population under a stay-at-home order. The governor said the state’s positivity rate jumped from 8.7% to 12% and acknowledged available ICU capacity had declined to 2.5%.
Brexit Talks Hit Another Impasse: The European Union’s negotiators balked at P.M. Johnson’s latest proposal leaving Brexit negotiations in a perilous state, at the same time as these new virus challenges. Data in the U.K. already point to a worsening economic picture. December 31 continues to appear to be the real deadline for an agreement, although this can presumably be delayed.
3Q GDP Final Revision Shows +33.4% on +41.0% Recovery in Consumption: The economy grew 33.4% in 3Q according to the final revision to the report, up from 33.1% in its previous estimate. Consumption was revised up from +40.6% to +41.0%, an increase of $8.8b in Dollar terms. Business investment in equipment and intellectual property were both revised higher ($8.4b cumulatively) although business investment in structures was notched even lower. Based on this final revision, the economy recovered 66.3% of its lost activity in 3Q alone. Now turning to the 4Q numbers, the data are poised to show another decent quarter of recovery, specifically on a rebuild in inventories. However, the core consumer data have started the quarter on a weaker tone.
Equities Recovered Most of U.K.-Related Losses as Congress Moved to Pass New Stimulus: The steep losses across Europe weighed heavily on U.S. equities early in Monday’s session, but the major indices turned it around as exchanges across the Atlantic shut down for the day. A new variant of the coronavirus was identified in the U.K. early last week which health officials believe is more infectious and, therefore, transmits at a faster rate. While there is still no evidence that it causes a more severe disease, the related worries led many countries in Europe and elsewhere to ban inbound travel from the U.K. The uncertainty related to the new mutation comes just as major countries around the world are approving and beginning to roll out doses of the Pfizer-BioNTech and Moderna vaccines. Within the first hour of trading, the S&P 500 declined by as much as 2.0%. However, momentum shifted more favorably mid-morning and the index closed down just 0.4% on the day. While the actual votes didn’t occur until after markets closed, news over the weekend that Congress had agreed on $900 billion in new emergency stimulus helped provide some cushion against the concerns. After shedding as many as 6.6 bps to as low as 0.88% when equities were at their worst levels, the 10-year Treasury yield ended just 1.2 bps lower at 0.94%.
Lawmakers Sign Massive Stimulus and Spending Packages to Little Fanfare: Optimism around more emergency stimulus had been on the rise in recent weeks amid signs of progress toward a compromise agreement, leading to a relatively muted market reaction overnight to the actual passage of the agreement late Monday evening. Alongside the $1.4 trillion omnibus that will fund normal operations for the remainder of the fiscal year, lawmakers signed a stimulus bill to push roughly $900 billion in additional aid out into a slowing economic recovery. Many recent reports have signaled activity has slowed as virus statistics hit their worst levels of the pandemic and many states imposed restrictions to right the ship, highlighting the need for additional fiscal support as a historic 2020 nears its end. Little enthused by the actual signing of the highly-anticipated bill, U.S. futures were little changed an hour before the U.S. session began and Treasury yields had inched lower.
Asia Catches Up On the Concerns About the U.K. Strain While Europe Attempts to Recover: Asian stocks had earlier closed down 1% following Monday’s tumultuous trading in Europe and the U.S. on reports of widespread new travel restrictions in response to the U.K.’s new virus strain. While that remains a clear concern, European equities were on the mend with the Stoxx Europe 600 up 0.9% in a partial recovery of yesterday’s 2.3% slide. While data overnight showed the U.K. economy grew 16.0% in 3Q, a sharp but partial snapback from 2Q’s historic 18.8% contraction, the pound was weaker on worries about the new virus strain which piled on to worries about the possibility of a messy Brexit next week. Treasury yields were also subdued despite Congress passing the spending deals, with the 10-year yield down 0.5 bps to 0.93% ahead of the final reading of U.S. 3Q GDP.