The Market Today
Government Funding, COVID-19 Stimulus, Brexit – All in the Air Heading into Holiday
by Craig Dismuke, Dudley Carter
We wish you a restful, relaxing, and healthy holiday. Merry Christmas!
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Headlines: While uncertainty about U.S. stimulus remained top of mind Wednesday, most of the focus was on headlines out of the U.K. Away from the virus, Brexit talks seemed to take a turn towards an agreement following reports of a compromise on the fisheries issue that had led talks to the brink of breaking down earlier in the week. As it relates to the virus, the U.K. reported more than 39k new cases, a record for the pandemic. The U.K. announced that it would implement the highest tier of restrictions for England starting on December 26 in an attempt to slow down the accelerating outbreak. Ireland and Israel both said they had discovered cases caused by the U.K. virus strain and Canada announced that it was extended restrictions on travel from the U.K. until January 6. On a more positive note, Canada also approved the Moderna vaccine for use and the CDC said more than one million doses of vaccines had already been administered in the U.S.
No Reports Today, but Plenty in the Air Over the Holiday: There are no economic reports of importance scheduled for release today. However, much will remain in the air over the Christmas holiday. President Trump has not yet agreed to sign the government funding and COVID-19 stimulus packages. Government funding has been approved through December 28th only at this point. As discussed above, there is optimism for a Brexit deal, but we have been here before. December 31 appears to be the next hard deadline to strike an agreement. All eyes also remain on the variant strands of COVID-19 and how those may affect the efforts to protect people’s health and reignite economic activity. Finally, the balance of Congress remains to be determined with the January 5 runoff approaching.
Potential Brexit Deal Sent U.K. Yields Soaring and Other Sovereign Rates Modestly Higher: U.S. equities ended mixed Wednesday and Treasury yields posted modest gains, but the real market action was well east of Wall Street. Treasury yields hit their highs of the day early as U.K. yields spiked higher just as U.S. trading began. News broke just after 7:30 a.m. CT that negotiators from the U.K. and EU were closing in on a trade deal as the final hours ticked away towards a hard Brexit. The U.K. 10-year yield jumped more than 13 bps initially following the reports before ending up more than 10 bps. The British pound strengthened nearly 1% against the U.S. Dollar. If finalized, the agreement would bring contentious negotiations to a close four and a half years after the U.K. voted to leave the EU. The upward pressure applied by U.K. yields led to more modest increases in other European sovereign yields as well as U.S. Treasury rates. Despite a flood of economic data which signaled the economic slowdown continued into December, the 10-year Treasury yield rose 2.7 bps to 0.94%. Although the stimulus and omnibus bills passed by Congress remained unsigned on President Trump’s desk, the S&P 500 edged 0.1 bps higher.
Markets Tracking Brexit Headlines and the Big Man Before They Break for the Holidays: Trading should be light Thursday as most markets close early for the Christmas holiday. Investors will, nonetheless, be closely monitoring the headlines for signs that a Brexit deal has been finalized as they begin tracking movements of the first recipient of the Pfizer-BioNTech vaccine. An MSCI index of stocks in Asia closed up 0.5% and the markets that were open in Europe mostly rose, lifting the Stoxx Europe 600 by 0.2%. Reports indicated yesterday that a post-Brexit trade deal between the U.K. and EU was “imminent,” but the final text had yet to be agreed on by 7 a.m. CT. While a fisheries compromise was said to have been reached, an Irish government official said “There is some sort of last-minute hitch” on the “small text.” Nonetheless, there is growing optimism that a deal could be announced sometime today, giving the U.K. FTSE 250, which focuses on domestic stocks, a 1.2% boost to its highest level since February. In the U.S., the COVID-19 stimulus bill that would unleash $900 billion in new aid and the broader omnibus to fund the government through September still hang in the balance after President Trump chastised Congress for providing inadequate support to U.S. consumers and businesses. A government shutdown could occur Monday if the President chooses not to sign the bill into law. At 7:40 a.m. CT, U.S. equity futures were higher by around 0.2% and Treasury yields had declined by less than 1 bp.
Wednesday’s Second Round of Reports Shows Some Weakness: In Wednesday’s second round of economic data, another consumer confidence index showed some further weakness later in December and the trend for new home sales looks less stellar than before. The University of Michigan’s preliminary estimate of confidence in December was revised down from 81.4 to 80.7, below the 81.1 expected, on a modestly weaker current assessment. The final reading represented a 3.8-point gain from November but a 20.3-point drop from February’s pre-pandemic level. In the new home sales report, activity contracted 11% in November, a much sharper drop than the 0.5% decline that was expected, and each of the three prior months were revised lower. While the most recent trend looks weaker than anticipated, the 841k annualized pace for sales remained 23% higher than the average pace for 2019. Moreover, on a non-seasonally adjusted basis, sales remain very high (see chart below).