Following Tuesday’s decision by Trump to abruptly end stimulus talks until after the elections, stocks and other risk sensitive assets sold off sharply. However, there was no follow through overnight as Asian markets rebounded and Europe started positively, causing US index futures to rise around 1%. Gold and silver also came back as the dollar eased back a little against most majors except the Japanese yen.
Tuesday’s price action was a reminder how much investors rely on stimulus to keep the markets afloat, after various stimulus injections post lockdown triggered one of the sharpest rallies ever seen. Without stimulus, the economy and the markets would certainly be struggling badly right now. That’s why Federal Reserve Chair Jerome Powell called for more fiscal spending to keep economic activity supported at this critical juncture of the recovery phase.
But what does Trump’s decision to ended talks with Democratic leaders on a new stimulus package mean?
In short, Trump’s decision has dashed hopes of an immediate stimulus injection. The possibility for a contested election means the wait for more fiscal spending could be a long one, increasingly the possibility of more job losses.
However, there is a silver lining.
Now that there won’t be any agreements on stimulus before the election is out of the way, the Democrats could then pass their original $3.4 trillion stimulus in January should Joe Biden win the election. This would be a much bigger package than could have been possible in a potential bi-partisan agreement pre-election. So, although Trump is widely seen as business- and market-friendly, this may explain why the markets have rebounded today and that investors do not appear to be too concerned about the rising probability of Biden winning the election. On a side note, it is also worth pointing out that a clear win by Biden would also reduce the risk of a contested election, and thereby the uncertainty that comes with any legal battles. Obviously the medium- and long-term implications of a win for the Democrats on the markets are potentially not going to be as favourable given that taxes will most likely increase, potentially offsetting the impact of the stimulus boost. But the short-term boost of a bigger stimulus package is what matter for short-term focused investors and traders.
It is also worth pointing out that according to Donald Trump, his government will pass a “major” stimulus bill that “focuses on hardworking Americans and small business,” immediately after a potential win for the incumbent. This package may not be bigger than what the Republicans have been willing to offer in a bi-partisan deal, but it will be some stimulus, nonetheless. In fact, by the time this passes, it could be that economic activity would have deteriorated rapidly, meaning that even the Republicans would then be forced to put forward a stimulus bill that is larger than what they are willing to provide right now.
What’s more, with the fiscal stimulus delayed, the possibility of more monetary policy stimulus from the Federal Reserve has now increased. If Jay Powell now hints that more monetary support will be provided in the short term, then this could give a boost for the markets.
