Market Overview

17 August 2020

Global Markets Are to Delay Updating New Records

The United States Congress being on recess with no stimulus deal plus a postponed review on U.S.-Sino trade agreement are the two semi fresh, but aggravating factors for the moment against an ongoing and rather permanent mitigating circumstance in the macroeconomic recovery background. All three of them taken together serve as a key combination of the pros and cons arguments, when investors and traders are performing as "trial lawyers", "witnesses" and "members of the jury" to deliver a judgment concerning the market "case". 

The Congress members failed to find any joint compromise package decision to avoid evictions and social woes before they officially take a break for the summer and return in  September. So, millions of American citizens are facing their monthly bills as everyone in Congress continues to make their six-figure salary while on vacation. The Democratic House Speaker Nancy Pelosi told CNN reporters last week that she doesn’t want stalled negotiations for another round of relief to drag until next month when government funds are set to expire, as "people will die,” she said. 

Pelosi repeated her offer for Republicans to up their price tag by one trillion Dollars, with Democrats lowering theirs by the same amount, after the democratic wing previously passed a more than three trillion Dollars package. But, the Republicans have said that even a two trillion Dollars bill would be too steep, with Treasury Secretary Steve Mnuchin's opinion that state and local governments do not need as much money as Democrats are proposing. Then Pelosi proposed: “Let’s meet in the middle, we’ve said all of that... But until they’re ready to do that, it’s no use sitting in a room and let them tell us that states should go bankrupt.” 

Members of the lower chamber could return before September if they can reach an agreement with the White House. They have at least one more reason to interrupt their vacations, as on Saturday, the same Mrs Nancy Pelosi added that the Democrats are considering recalling Congress from a summer recess over the federal Post Office changes that have prompted a strong alarm about possible impact on the 2020 election. They are angry about some cost-cutting measures imposed by President Donald Trump's new Postmaster General, Louis DeJoy that could prevent an unprecedented wave of postal voting that may contribute to obscure the real results of the November presidential elections. 

This is a political game, but it could help to enter the home stretch on the financial stimulus package too, which is important, or maybe even critical point for the markets. But now Trump is making one-sided steps saying he is ready to send up to $3,400 stimulus checks to families consisting of four people in addition to the executive orders for the payrolls tax cuts and $400 per month pandemic unemployment benefits. That's much better than nothing, but not enough for the impatient crowd at the markets. This situation has not yet created a threat of a strong U.S. stock market correction, but it is clearly an important reason why the S&P500 broad market index has delayed updating its annual highs above 3400 points, at least for several days or couple of weeks more. 

But even the Republican John Curtis released a statement via Twitter, which reads: "While I share the President’s frustration [with a] political gridlock, circumventing Congress’ constitutional mandates by issuing executive orders is irresponsible and ignores the separation of powers ingrained in our Constitution. Taking political shortcuts bypasses the momentum of legislation & hurts our system of checks & balance — no matter who is in power. America will have a better & more durable result when broadly-supported action is taken by the diverse interests represented in Congress, as opposed to questionably legal executive orders from the Administration". 

Another story that may temporarily block the further advancement of the market is that the United States and China have delayed conducting a time hack on their January's "Phase One" trade deal initially slated for Saturday. Sources familiar with the plans of the sides told Reuters about the reasons like scheduling conflicts because of the conference of senior Communist Party leaders at the seaside town of Beidaihe on China’s northeast coast. However, the main media version now is the need to allow time for more Chinese purchases of U.S. exports. At the same time, the postponement did not reflect any substantive problem with the trade deal, the source said, adding: “The new date has not been finalized yet.” Donald Trump repeated his view just a day before the proposed online call of delegations that the trade deal was “doing very well,” but did not comment on the delayed meeting. 

As China’s economy is seen to have recovered from a coronavirus limitations much earlier this year, their import purchases have increased. Just on Friday, the U.S. Department of Agriculture reported the sale of 126,000 tonnes of soybeans to China, marking the eighth consecutive weekday with large sales to Chinese buyers. U.S. oil traders and shipbrokers told Reuters that "Chinese state-owned oil firms have tentatively booked tankers to carry at least 20 million barrels of U.S. crude for August and September, indicating a ramp-up in energy purchases". So it looks like the U.S. and Chinese negotiating partners are actually giving each other more time to fulfil their obligations and have no plans to abandon the trade deal. 

Delaying the meeting, even briefly, could allow China to complete more purchases, which would help Lighthizer persuade Trump to stick to the deal. Signs of Chinese compliance could also help blunt criticism from Democratic opponents as their presidential candidate Joe Biden said the agreement that Trump has called a historic win is “failing.” “I think Trump is a little afraid that this triumph of his will be hung around his neck, but more purchases and a bit of a delay would clearly help,” said Mary Lovely, a senior fellow with the Peterson Institute for International Economics. 

Markets are waiting for more details and reasons for trade deal related optimism. Stock indexes are still fuelled by good macroeconomic reports from both America and Europe, including Friday's U.S. report with an increase in retail sales by 1.9% excluding cars on annual basis, instead of the expected 1.3%, and they also rely on economic sentiment data from the University of Michigan and on a decrease in the number of jobless claims. More indicators of manufacturing and service sectors activity will be released in Europe near the end of the week, and Philadelphia Fed index is due to be published before the weekend. Not many reports are in the field of economic releases, but they are mostly expected to be rather positive and to help markets to be on hold.

 

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