Saturday, July 2, 2022

Stimulus Is Unequivocally The Most Necessary Condition For Markets

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A modest risk-on mood in markets reflects a hopeful but not largely expectant stance around US fiscal negotiations. 

Risk markets continue to tread water this week as stimulus optimism was tempered by lack of negotiation progress, increasing Europe’s restrictions, and the weak US claims number that sees everyone’s sentiment indicators are flagging. As the risk rises of a slowing recovery, leaving the economy stalled below full capacity, so we have finally reached a juncture where a stimulus deal is unequivocally the most necessary condition for markets to shift higher.

With Tuesday negotiations cut off looming, stock investors are back staring down the stimulus wishing well, peering for a treasure or two while oil traders are lining up at the stimulus lottery ticket window, hoping their number hits later today. In this situation, deadlines are meant to be broken if constructive progress endures as political calculus allows for a pre-election deal. After all, what politician wants to be painted as voting for unemployment. 

Election risk remains high even with policy uncertainty easing a bit as options still suggest a drawn-out election outcome: December remains less than 1 point below November, a gap that would presumably widen if a fast resolution were expected. So, the importance of a last-minute stimulus deal, even a skinny number, will go far in bridging the gap until a broaderdeal post-election rolls out, even if the election is contested.

Currency Markets 

is little changed as Brexit headlines are dismissed as posturing, and dovish BoE rhetoric offers little new

The and are the underperformers following dovish comments from their respective central banks. RBA Assistant Governor Christopher said the central bank still had room to compress short-term interest rates, and it would not be unexpected were the Bank Bill Swap Rate (BBSW) to pop below zero

The BoJ is likely to downgrade its growth and inflation outlook when it reveals its new quarterly forecasts at next week’s meeting, according to sources (Reuters).

Gold Markets

is still struggling to move much higher, even with the US trading a bit weaker across the G10 space. Details of further US fiscal stimulus seem to be the primary driver of price action, and that should remain the case into the US election.

Equities and broader risk sentiment seem to be the secondary drivers at the moment. Most markets have pulled back a bit amid an acceleration in new Covid cases, and with stricter mobility & social distancing restrictions being re-imposed

OPEC/Oil 

OPEC has set a clear precedent and is taking a proactive approach to manage oil markets, both at OPEC+ group level and through the individual actions of critical producers like Saudi Arabia.

If the ramp-up of Libyan production and the pace of the global demand recovery is a problem for the price, why would they not be motivated to take a slower return of shut-in OPEC+ production?





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