US fiscal stimulus is key to market performance in the coming weeks

Investors are eager for bipartisan support on Covid-19 relief package

A trader works on the floor of the New York Stock Exchange. With so much uncertainty around the US presidential election, the confirmed result sparked an initial upward move in risk markets. AFP

As the dust continues to settle on the US presidential election, the same old issues in Congress have riled market sentiments this week. With so much uncertainty around the election, the confirmed result sparked an initial upward move in risk markets – however, across-the-aisle political gridlock calmed investor sentiments.

On Monday, as top Democrats and Republicans continued to discuss the long-awaited Covid-19 relief package, it was apparent that no deal will be struck in the immediate short term. Senate majority leader Mitch McConnell said a limited stimulus bill should be passed by year end. However, Senate Democratic leader Chuck Schumer said the Republican proposal is a “totally inadequate solution”.

Financial markets have been eagerly anticipating the second Covid-19 stimulus package. An extension to the plan launched in March, the new economic relief package keeps many of the benefits of the original plan, including a potential second stimulus cheque of up to $1,200 for Americans who qualify and an extension of the $600 unemployment benefit.

For many months, Democrats and Republicans have battled on the size of the package. In October, Democrats proposed a plan in the range of $2.2 trillion (down from their original $3.5tn package) while the White House replied with a $1.8tn plan, which was swiftly rejected.

Amid the political posturing, a figure and deal needs to be agreed, which would inject immediate stimulus into a US economy that could stall again. With the ongoing pandemic showing no signs of abating in the US, this is being reflected in economic data points, which are showing signs of slowing.

During last week's Federal Open Market Committee meeting, Federal Reserve chair Jerome Powell put the ball in the court of the federal government, asking it to announce the much-needed stimulus. This theme will be critical to the performance of financial markets going forward, as we have already seen from the recent pricing action.

What is also critical to note in this scenario is that while the race to the White House and the House of Representatives is confirmed, there are two key Senate seats up for grabs in Georgia, which could determine the balance of power in the upper house of the Congress. If Democrats manage to make a good run in the January 5 run-offs, it would see the balance of power shift and make passing policy for the Democrats and Joe Biden much easier.

It remains to be seen if the fiscal stimulus package will be delivered before the results of those run-offs or if the two parties can agree and deliver it by December.

History has shown us that US stock markets typically rally in the aftermath of a presidential election, but this time, we could see anaemic pricing action if this deal fails to pan out sooner rather than later. Expect this to be the major theme for US markets in the weeks ahead – which will also drive investor mood.

Looking at the performance of the Dow Jones Industrial Index, at the time of writing it is currently trading at the 29,000 level after testing the all-time high of 30,000 on Monday. Markets caught a nice bid to run to that 30,000 level after Pfizer came out with encouraging news that a vaccine that prevented more than 90 per cent of coronavirus infections was being developed. While the euphoria settled after the initial news, markets digested the reality of timelines, scalability and distribution of a large-scale vaccine to the population, and as a result sold off after the initial hype.

I am keeping an eye on the 29,933print and expect to see another run to this level in the next two weeks, backed purely by a psychological and sentiment-driven trade. But overall, I would revert from building any positional, long-term trades in the US equity markets until the stimulus plan is clearer.

The US dollar has had a torrid few weeks as risk appetite has edged higher following the election confirmation. Already down 1.2 per cent on the month, we are seeing some good buying coming into the US dollar index in the channel between 92/92.20. These levels should hold in the next two weeks while upsides will be capped at 93.50.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti