Is Biden's Bipartisan Infrastruture Deal Dead On Arrival?

Okay, very good morning folks. Hope you're all doing well and have had a good week. Two points just to kick things off with this morning. First is it's the end and last day for some of our summer analysts, so just wanted to say well done and good luck on your final day and for the future. Always stay in touch, of course, and I'll speak to you guys later on. Otherwise, the second point is the weekly podcast. Myself and the head of trading, Piers, will be having a chat a bit later on this morning, and that recording for the latest podcast episode will go out today. So don't forget to just search for The Market Watch by Amplify Live on the likes of Apple Podcasts, Spotify, Google Podcasts, and so on. All right, let's get straight into it then in terms of the briefing for this morning. And I'm going to kick things off then with a bit of review of how we finished on Wall Street, which was positive. And we finished up 0.6% in the S&P, about 1% in the Dow, and 0.6% in the NASDAQ 100. And as you can see here, in terms of the stock indices in overnight trade, we have now thrashed out brand new all-time highs. So it definitely didn't feel like that this time last week because we were seeing, um, a pretty synchronized sell-off on the back of a hawkish tilt from the Fed midweek, and then Bullard coming in with those comments this time last week. And since that point, we've just put in a really strong recovery, particularly on Monday. And then those previous all-time highs, which stood at 4258.25 in the S&P, were broken yesterday. We actually have now topped out at 6450 in overnight trade before Europe now have just stepped in. And we've seen a bit of a pullback. Those previous points of the low that defined the bottom of the range in the Asia-Pac session will now be the next area of support. And to see equities here just come off their initial highs from the overnight extension of Asia trade from the higher US close, I don't think is particularly unusual to see at all. And I wouldn't be that surprised to see equities just fade a little bit through the morning, waiting for the US to come in. And so the DAX has kind of followed suit, initially bid, and then it's just dipped a little bit here more recently. It's just some of the fatigue in that extension of that move comes in. Why is that Why did that move happen? Well, a lot of people are pinning it on the fact that finally Joe Biden's managed to get a bipartisan agreement on a $579 billion— that's the new spending part of an infrastructure bill. This still needs though to be passed through Congress, is one of the key things. And the difficulty will come as the bill moves in tandem with a much larger package of spending and tax increases that the Republicans generally oppose. So although they've made an agreement, Biden said he's going to veto things if it's not bolted on to a bigger, broader package with this new proposal. So for me, I don't know, I mean, a lot of the financial media is pinning that the rise yesterday was on this. I think equities were already moving higher. Sure, it might have been a contributing component to that rally yesterday, but I don't really see this as it stands at the moment, having that smoother sailing via Congress. And in fact, overnight, the Senate Minority Leader McConnell suggested he is now more pessimistic than optimistic of the passage of the bipartisan bill for the very reasons that Biden said he'll veto if it's not plugged into a bigger, broader package. And so for me, it's almost, almost dead on arrival here. So I mean, if the equity rise yesterday was down to this very reason of this deal, well then it should come off. But the point I think I'm saying is that I don't think yesterday's rally necessarily was completely, um, on the back of just that in isolation. So yeah, a little bit of a fade in equities perhaps then, just to come off that initial push higher going into the end of the week. But the book squaring perhaps going into the, um, the last trading session of the week, uh, could be— could well be seen. Otherwise, in the other asset classes It's really been a quite quiet week overall. I mean, if I was just going to look at gold and T-notes, you know, just step out of some of the initial kind of day-to-day fluctuations. And if you actually go back to the week as a whole, I mean, if I just put a rectangle just so it's as clear as, clear as possible, this is basically the week's price activity in gold. And now that is range-bound, and the bottom end of that range still being held at around 74. And so keeping an eye on that still today because we're not too far from there, just hugging the pivot level in the futures at the moment. Then the upside, 87, 88, um, is really the more definitive near-term high from yesterday to be keeping an eye on if we were to move off up and beyond the R1. And then up then to the weekly range high at around the 1795 area. But, you know, considering the general scope and range of gold, that is a pretty tight range overall. And then the US 10-year other than the Monday move that we saw where yields did push on up higher, then since that point, again, respecting a relative range. And actually, we've kind of been just narrowing that range as the week has gone on. And it's almost felt like the market's getting a little bit Fed comms fatigue to a certain extent, because it, you know, this, this movement here in a fairly tight fashion of really just 7-8 tick ranges in the last 24 hours is irrespective of the fact that you're getting, you know, multiple Fed speakers coming out. There are quite a few hawkish noises, but of course these are coming from the hawkish candidates of the, um, of the FOMC. And so they're not really that surprising at this point. And the markets, I think, have readjusted to the idea of, uh, the fact that, you know, that is the current stance. But the center ground held by Powell and Williams this week has remained un— unmoved at this point in terms of their view on the transitory side of things. Otherwise, elsewhere, the FX markets— obviously you had the Bank of England yesterday, did see a bit of a downtick, which explains this larger red candlestick here. And not so much, I think, the Bank of England being dovish. I just think it was a bit of a disappointment for those looking for something more hawkish, and we saw a bit of an unwind of those outside bets in combination with a technical breach. You can see here of what was quite a key level of technical short-term support that just added some downside weight momentum to that move and sell-off. And so we've just settled now, um, at the moment, uh, flat on the day, not too much going on the Dixie right now. 139.28 it trades. Again, this comes irrespective of the fact that the Bank of England do foresee further quite substantial upticks in inflation for it to go above 3% in the coming months. But it's almost like the— that situation's been normalized by the Fed and the US circumstances because they're just so much higher than that in terms of those pressures. And the Bank of England as well still sees these pressures as being temporary in nature, i.e., transitory. And outgoing hawks like Haldane dissenting from the pack and once again voting for, for the ceasing of the asset purchase facility came as no surprise, and no one actually joined him, which was again a slight disappointment for those looking for a more hawkish outcome, explaining that fall in the pound. The euro, um, yeah, pretty range-bound again. The bottom end of that range I'll be keeping an eye on today, really, is the— for the week, in fact, has been around the 1.1938.5 in the futures. You can see here I'm just keeping an eye on a trend line coming down towards the current price action where we're trading at the moment. So be interesting to see how that reacts a bit later on. That will probably coincide with the previous high that was seen in the overnight Asia-Pac session. So again, just keeping an eye kind of around that level here. But ultimately, this type of price activity, it does tend to lead to a breakout in either way. Perhaps we need to really wait for the US session to commence and see any movement led by the dollar rather than the euro, with a lack of real European calendar events. And of course, with US core PCE coming out later. All right, quick look at a few other things. One thing to mention was US stress tests. They did come out last night, and in fact, US bank stocks did trade higher in aftermarket trade despite the fact that this pretty much came out as expected. But it's kind of a confirmation, if you like, of those expectations, because in reality, what this, this is going to lead to is more greater flexibility now for banks to resume buybacks and dividends. But overall, the Federal Reserve, now releasing its annual stress test, said that all 23 institutions remained well above minimum capital levels in a hypothetical economic downturn. Now, for those who are not familiar with stress tests, this is a regular occurrence that happens. Now, part of the main area of which a central bank covers in the Western developed world, like in the US or the UK, for example, at the Bank of England, is regulation and supervision, and a big part of that is safeguarding the economic system. And stress tests are quite integral to that, given what happened on the back of the GFC, um, 11, 12 years ago. And so these are fairly frequent, they very rarely carry and yield any surprises. And in fact, all these banks passed very easily in these stressed scenarios. So what basically happens is The researchers at the bank will run these banks based on different levels of their capital that they hold through adverse economic conditions. And ultimately, the most sizable shock that they were running in their model was that unemployment would peak at 10.8% and under a situation of the 55% drop in the stock market as a scenario. And even in that case where there'd be close to half a trillion dollars of losses, loss cushioning capital would still be more than double the minimum required levels even in that situation. So as such then, generally what this means is that analysts are at the expectation now that the industry can hike buybacks and dividends by tens of billions of dollars, probably starting as soon as next month. This is called the stress— stress capital buffer framework of which that operates under. The Fed, though, has instructed lenders to wait until Monday afternoon to start disclosing their plans, according to people familiar with the situation, as reported by CNBC. So we might get some more color on that as they chew over what's the best course of action this weekend, on Monday. Not, not particularly a big deal, just something to be aware of, I would say. On the COVID front, Something we were mentioning at the very beginning of the week, and it continues to be a developing kind of story at the moment, which isn't having too much, if any, definitive impact at the moment on financial markets. But I still think it does warrant being quite vigilant. And that is now that the Delta variant, which had been identified in pockets of some of the major economic areas within the eurozone like Germany, France, Spain, and Italy, In Italy, up to 25% of total cases now in Italian regions are being linked to the Delta variant, up from just 1%, which was registered about a month ago or so. The country currently is delivering around 500,000 shots per day. Then in terms of a timeline, to give it a bit of context, they're now targeting 80% vaccination levels by the end of September. On the back of this as well, a few other things. More than 500,000 residents of Sydney in Australia are going into lockdown after an outbreak now identified of the Delta variant as well. And if you're interested, I did do a couple of tweets yesterday. If you just go on my Twitter account, my handle's obviously here, um, and there was quite an interesting piece out of JP Morgan. They were talking about running, uh, basically they were modeling what the situation could look like with the Delta variant, as we know, kind of contributing to around a third of all cases now in the US, using a benchmark reference then as the UK and how that Delta variant developed to model what the US could look like. And their assumptions are suggesting that we might not see the peak of the Delta variant in the US for another 5 weeks. Obviously, we've got a seasonal holiday in regards to the Fourth of July as well coming out, which we've seen previously on Thanksgiving, Christmas, New Year's spikes in case rates. And so generally their conclusions are— and I'll leave you to digest the thread that I posted yesterday— but that given the fact that we're yet to see the peak, it's going to go— the numbers are going to get higher in the US. And that means then when overlaying this with the current speed of vaccinations, which has decelerated from initially how fast it was picking up a few weeks, months ago means then that basically the spread is going to outweigh the vaccinations, meaning we're going to have another wave in the US. So just something to be aware of and to continue to monitor. Again, the market's not freaking out at this point in time, but as per with all of these geographic areas, the transmissibility, the immunity, invasiveness as well as some of these new Delta Plus variants is something we're just mindful of at this present point in time. Otherwise, the final thing was Iran. I just wanted a quick word on that. Nothing really too surprising, to be honest, but the US State Department official has said the US still has serious differences with Iran, and at this point in time then, they have not yet tabled or scheduled a 7th round of talks for the time being. So that's kind of ongoing, but I think as you would expect Will be interesting though, just given the newly appointed president-elect and his inauguration, inauguration happening in August. I still think we could see, as what some domestic sources have reported in Iran, that perhaps more movement on this, not right now but in the coming weeks ahead of that inauguration, in order to then blame any concessions on any potential deal, of which the new president has already said he wants to cut on a return to the nuclear agreement of the 2015, um, accord on the previous president, Rouhani. So nothing happening quite yet. I don't think that's particularly surprising. We are anticipating the movements and, and more dialogue as we continue to go forward in time. In terms of the calendar for today, um, this morning you've just had out the latest German GfK consumer confidence figure. Let me just refresh my news scroll and I can bring that to you right now. Um, so that came in at -0.3 versus expected -4, so negative but a little bit better expected, but it's never really that much of a market mover to be quite honest. So moving further into the day, nothing really coming out of interest for the UK European morning, so very much US-centric session and all eyes are going to be on the latest core PCE price index. This is for the month of May, and the reason for that is that in April, as you can see here, the measure jumped 0.7% from the previous month and delivered its biggest year-on-year jump since the 1990s, going up to 3.1%. And again, it's expected to increase further to 3.4%. First things first, I'm sure there's at least one or two people thinking, what on earth is PCE? PCE stands for personal consumption expenditure price, in, uh, essentially, and it measures the prices paid by people for domestic purchases of goods and services excluding the prices of food and energy. And the core PCE is the Fed's— seen as the Fed's preferred measure. So as such, then, quite a lot of people will be watching this figure. For the moment, as you will know, the market's been relatively content to kind of look through upside surprises on the inflation front. Now we've kind of acclimatized to the new norm and this kind of belief of transitory temporary factors lifting these price pressures. That doesn't mean though I don't think today's number could create a degree of intraday volatility. Certainly the top end of the range is 3.6. If we jump up from 3.1 having that already been the highest and having seen last month the biggest leap since the early '90s. If it does another monumental leap, I'm definitely sure you'll probably have a negative initial reaction. Um, whether or not the markets then can kind of see through that will be the question. So I definitely think today's number will be, um, definitely interesting, definitely could be and probably will be the main catalyst for market direction to see off the rest of the day. So really it's at 1:30. Again, how much does that make on a broader, out-of-the-intraday picture perspective? Again, I don't think a great deal, not unless it's a, a really strong number. I think you'll still get the hawks saying they should be reacting at this point, and you'll get Powell and the rest who are a little bit more measured in just continuing the current Fed stance, would be my interpretation. Speaker-wise, yeah, more Fed speakers, of course. This time we get the uber-dove Kashkari speaking first at 3:00, Hork-Mester at 4:35, Rosengren, center-neutral, at 6:00, and then Fed's Williams comes back out at 8:00. So just to be aware of. All right. Going to leave it at that. Let you guys get on. Don't forget to check out the podcast. Latest episode coming out later today. Take care. Have an amazing weekend. And I'll see you Monday.