By Han Tan, Market Analyst at FXTM
With less than two weeks to go before the curtain fall on 2020, investors are still being made to wait on the ultimate fate of a couple of market-defining events. US politicians continue to jostle over the fate of the next fiscal stimulus package, while the EU and the UK have yet to reconcile their differences surrounding a Brexit trade deal.
There is a common feature of proceedings on both sides of the Atlantic that time is running out. Although major uncertainties refuse to vanish, markets are already making assumptions.
Fiscal stimulus deal to boost US stocks higher
US stocks climbed to record heights once more on Thursday on the hopes that Congress could seal a deal by the weekend.
However, recent commentary out of Congressional leaders has doused such expectations, who are even hinting at a brief federal government shutdown. As a result, US stock futures were edging up in early Friday trading.
Investors are willing to believe that more fiscal stimulus will arrive; it’s just a matter of “when”, not “if”.
The current state of the US economy clearly warrants more financial support. Thursday’s initial jobless claims were worse than expected, while US consumers evidently reigned in their spending in November.
The pandemic is still claiming lives at an alarming rate and the total number of US Covid-19 cases has now exceeded 17 million.
The fresh injection of government funds into the economy would serve as justification for the already-lofty valuations in US equities. The longer risk assets are made to wait, the bigger the concern of a pullback as fiscal stimulus ‘fatigue’ sets in.
Plenty of support for risk sentiment
Still, risk assets should have enough reasons to patiently wait for a positive outcome, despite having endured multiple false dawns after months of negotiations that have yielded naught.
The expected FDA approval for Moderna’s vaccine, which could happen on Friday, is set to appease risk sentiment while waiting for the political impasse to be resolved.
Also, stock markets can continue taking heart by the Federal Reserve’s latest pledge to continue supporting the US economy and financial conditions, which ultimately translates into a conducive environment for further equity gains.
Brexit’s umpteenth ‘last-chance saloon’
Brexit trade talks have been issued a fresh deadline by the European Parliament that has said that an agreement must be reached by Sunday in order to allow enough time for ratification.
Even allowing for broad based Dollar weakness, the Pound is still willing to cling on to hopes that a deal can be struck, going by the fact that GBPUSD continues to trade around its highest levels in over two years.
Despite there being less than two weeks left before the Brexit transition period ends, both sides continue to harp on about the “big differences” between the UK and EU’s respective stances.
Sterling’s performance of late indicates that more of the trade deal optimism has been baked in compared to the risk of a hard Brexit. This finale could bring either sweet confirmation or a rude shock for markets, while leaving investors on tenterhooks in the interim as we see out this tumultuous year.
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