Stimulus optimism comes and goes in these markets and it seems to be making a comeback again on Tuesday as Pelosi and Mnuchin work to overcome their differences.
Mnuchin being in the Middle East isn’t ideal but it’s obviously not a deal breaker. Most of us have lived on video conferencing for the last seven months and barring the occasional network issue or interuption, it does the job. If anything is going to torpedo these negotiations, it’s not this. It may not even be Mnuchin or Pelosi, getting the Senate on board may be the biggest obstacle to overcome.
In fact, Pelosi and Mnuchin appear to be making some positive moves. The White House has already increased its offer and Trump has indicated he’d be willing to go further as the election moves into the final stretch. One of Pelosi’s aids suggested they’re continuing to narrow their differences, which seems to have got investors excited. Given the objections in the Senate, this may still be a little premature.
Sterling facing boy who cried wold moment?
The game of Brexit chicken is becoming ever more intense, with the UK refusing to restart talks until the EU offers more concessions. A bold tactic from the country with the most to lose from a deal failing to be reached but this is how tough negotiations go, perhaps just typically in a less public manner. It’s pointless judging officials now, the outcome is all that matters.
I remain confident that a deal will be reached that averts a no-deal as it’s simply inconceivable to me that either side would choose the alternative in the midst of a pandemic, let alone at the best of times. Sterling is still quite comfortable with the way things are unfolding which suggests my confidence is still shared by the markets.
Naturally that creates massive downside risk with only a relief rally to look forward to in the event of a positive outcome but we’ve had four years of noise, there had to be a point when traders became a little numb to it. Could be another 23 June 2016 moment for the pound if this turns out to be a boy who cried wolf moment for negotiators.
Oil bullish on stimulus and output cut delay
Oil prices are steady after pulling off their recent highs, as OPEC+ passed on the opportunity to signal a willingness to delay two million barrels of planned increases from January, as part of its tapering of record cuts earlier this year. The cuts still stand at 7.7 million barrels but with demand struggling to recover and Europe and North America in the early stages of a second wave of Covid, traders are seemingly confident that increases won’t go ahead as planned.
A US stimulus deal would probably give oil prices a temporary kick higher as well, given the risk to the economy of an agreement not being reached. But broadly speaking, the risks still remain tilted to the downside as the second wave hits. OPEC+ holds the key but it may take a move below the early Autumn lows to pique their interest.
A breakout is near
Gold is continuing to consolidate around $1,900 and the walls are continuing to close in. A breakout doesn’t look far away and, in the near-term at least, whether or not a stimulus deal is struck looks the most likely catalyst for a breakout in either direction. The medium term outlook remains bullish but I remain skeptical about the ability of Congress to pass a spending bill so we may see another test below first.