Daily Market Comment – Stimulus uncertainty hits sentiment; RBA flags more easing

  • US stimulus talks make progress but short time window spooks investors
  • Aussie slips as RBA gives clearest indication yet it will ease policy soon
  • Pound steady despite endless brinkmanship in Brexit talks

Stimulus deal getting closer but may come too late

Talks in the United States on a new round of fiscal stimulus remains very much the focus for investors as time is fast running out for a pre-election spending bonanza. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have reportedly continued to “narrow their differences”, with more discussions expected later today.

However, even if the White House and the Democrats succeed in striking a deal before today’s end-of-day deadline, there are still some uncertainties as to whether that would give Congress enough time to pass the bill, not to mention the strong possibility of Senate Republicans defying the President and voting against a large stimulus package.

The one too many question marks about the size and timing of the next virus relief bill overwhelmed investors on Monday, pushing Wall Street sharply lower. However, the stimulus talks weren’t the only concern as election anxiety has also dampened the market mood.

Democratic candidate, Joe Biden, may be comfortably ahead in the opinion polls but if recent history is anything to go by, the polls can get it very wrong, especially when it comes to the Electoral College system used in America. While there’s a very good chance Biden will become the next president of the United States, a close call could result in the election being contested in what would be the worst-case scenario for the markets.

The political uncertainty in Washington was also weighing on global equities today, with Asia ending the session mixed and Europe opening in the red. Though, US stock futures were modestly higher.

Aussie dives after RBA paves way for November move

The souring mood on Wall Street yesterday helped lift the US dollar off its lows and most majors continued to struggle against the greenback today. The Australian dollar was one of the worst performers as expectations that the Reserve Bank of Australia is prepping for major policy easing gathered pace.

The minutes of the RBA’s October meeting published earlier today as well as the comments by Assistant Governor Chris Kent strongly pointed to the Bank expanding its quantitative easing programme to include longer-dated bonds when it meets in November. A cut in the cash rate is also on the cards, though the RBA may save that ammunition for a rainier day.

The aussie has greatly benefited from 10-year Australian government bond yields being significantly above those of other advanced economies as the RBA currently targets only the 3-year yield. A policy shift that expands QE to further along the yield curve could seriously undermine the aussie, potentially sounding the death knell for its incredible rally.

The aussie was last trading 0.3% lower, dragging the kiwi down along with it.

Pound holds breath, waits for next move in Brexit chess match

The euro edged up on Tuesday, adding to yesterday’s gains as investors pared back expectations of an imminent action by the ECB to boost its asset purchases, while the pound was flat amid confusion about the state of the Brexit negotiations.

UK Prime Minister Boris Johnson is insisting that the EU must fundamentally change its approach for the talks on a post-Brexit trade deal to resume, accusing it of not respecting the UK’s sovereignty. Downing Street’s hard stance comes even after the EU agreed to the UK’s demands to intensify the negotiations and start work on a legal text.

But signs that behind the scenes the two sides are working to mend bridges is keeping sterling supported. Even though the odds of a no-deal outcome have gone up since last week, investors see the latest impasse as just another negotiating tactic and that some form of free-trade agreement is still doable before the year-end.

Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.

All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.

Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.

We are using cookies to give you the best experience on our website. Read more or change your cookie settings.

Risk Warning: Your capital is at risk. Leveraged products may not be suitable for everyone. Please consider our Risk Disclosure.