Futures Recover All Losses From "Fed-Treasury Split" Scare

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by Tyler Durden
Friday, Nov 20, 2020 - 08:04 AM

After futures dropped sharply, sliding as much as 1% during the Asian session after Steven Mnuchin announced that the Treasury would seek to recover nearly $500bn in cash from the Fed as it sought to end eight emergency credit facilities on Dec 31, sparking fears that helicopter money - which as a reminder is a coordination between the Fed and Treasury - would expire by year end, markets have managed to recover all overnight losses with the S&P last trading flat perhaps and just shy of all time highs, as traders realized that whether under Mnuchin or Brainard, the Treasury will promptly restore all emergency facilities in 2021 - it simply has no choice. Furthermore, Mnuchin said he is merely carrying out the law prescribed by the Cares Act, and his actions were not an indication of disagreement between the top two U.S. economic policymakers.

The mood was boosted by the now daily dose of positive vaccine news, which came shortly before 7am when Pfizer and BioNTech said they would submit EUA for their vaccine today (as expected), noting that the vaccines would be ready for distribution within hours of receiving approval. This could potentially enable use of the vaccine in high-risk populations in the U.S. by the middle to end of December 2020, dramatically shortening the time to market.

As a result, Pfizer shares rose 1.8% premarket  while Moderna also rose in premarket trading after news that its Covid-19 vaccine could receive a conditional European Union marketing authorization next month, while Gilead slides after WHO experts say there’s no evidence remdesivir improves survival. Apparel and home fashion retailer Ross Stores gained 3.4% after its quarterly sales topped expectations. Nasdaq futures rose 0.2% as investors returned to stay at home technology stocks. Netflix, and Microsoft all edged higher premarket.

Futures were initially spooked after Mnuchin sent a letter to Fed Chair Powell, in which he said $455 billion allocated to Treasury under the CARES Act should be instead available for Congress to reallocate. The Fed was instantly triggered, issuing a counter statement saying the "full suite" of measures needs to be maintained and although the programs were not used extensively, Fed officials felt their presence reassured financial markets and investors that credit would remain available to help businesses through the pandemic.

"Understanding how this spat between the Fed and Treasury ends up being resolved between now and December is absolutely critical," Virginie Maisonneuve, chief executive of MGA Consulting, said on Bloomberg Television. Markets face a possible headwind at the prospect of a withdrawal of the liquidity that has sustained them so far this year, she said.

Bulls also fought against the latest flare-ups in virus cases around the world which have continued to dampen sentiment. California fresh curfews to try to fight surging coronavirus infections, while Japan is facing a third wave of the virus, Hong Kong a fourth, and parts of Europe are already under recently renewed social restrictions. Sentiment was also hit by data that showed COVID-19 hospitalizations across the United States jumped by nearly 50% in the last two weeks.

"Despite those developments the fact the market is able to resist to this extent means there is some sun ahead, driven by the fact that in medium term economic activity will accelerate and there is positive news o the vaccine," said François Savary, chief investment officer at Swiss wealth manager Prime Partners.

The MSCI index of global stocks was 0.1% firmer and on course for its third weekly gain in a row. European stocks erased an early loss, and edged higher in a generally quiet session, with the Stoxx Europe 600 also headed for its third week of gains amid a rotation into economically sensitive sectors. Mining and energy firms led the advance as commodities from oil to copper rallied. U.K. software publisher Sage Group Plc plunged 13% after an earnings miss. The Italian FTSE MIB lead gains in Europe, up 0.9%.

The European Union could pay more than $10 billion to secure hundreds of millions of doses of the vaccine candidates being developed by Pfizer-BioNTech and CureVac, an EU official involved in the talks told Reuters.

Earlier in the session, the MSCI index of Asia-Pacific shares excluding Japan rose 0.4%, while Japan's Nikkei stumbled 0.4%, weighed down by a rise in new domestic coronavirus infections to record highs and with SoftBank climbing and Daikin slipping. Most markets in the region were up, with Thailand's SET advancing 1.2% and Singapore's Straits Times Index rising 1.1%, while Indonesia's Jakarta Composite slid 0.4%. The Shanghai Composite Index rose 0.4%, driven by SAIC Motor and Zijin Mining.

In currencies, the greenback traded mixed versus G-10 peers, with some risk sensitive currencies rising and others falling, though moves were largely contained to narrow ranges. The Bloomberg Dollar Spot Index was flat. The euro fell in early European trading after approaching $1.19 toward the end of the Asian session while the Australian dollar is having its best month versus the U.S. dollar since April, in terms of percentage change. The premium to own downside option exposure in the pound over the next week widens as European Union leaders look to step up preparations for a no-deal Brexit

In rates, Treasuries were slightly cheaper on the day in early trading after paring an advance that began late Thursday following clash between Treasury Department and Fed over preservation of emergency lending programs. Yields are higher by 1bp-2bp in 7- to 20-year sectors, 10-year by 1.3bp at 0.842% after opening under 0.82%, lowest yield since Nov. 9; it remains lower on the week by ~5bp.Yields extended their climb from session lows along with S&P 500 futures after Pfizer said it will seek emergency authorization for its Covid vaccine.  Bunds inched up, outperforming Treasuries, with no German bond sales until Dec. 2.

In commodities, oil prices steadied after losses the previous day, when concerns about coronavirus lockdowns affecting fuel demand weighed on the market. Brent crude was up 34 cents at $44.54 on the latest vaccine news. Gold fell 0.1% to $1,866.19 per ounce.

Looking at the day ahead, the data highlights include UK retail sales and public finances for October, along with Germany’s PPI. As well as this, we’ll get the Euro Area’s advance consumer confidence reading for November, and Canada’s September retail sales. Central bank speakers include ECB President Lagarde, Vice President de Guindos, and the ECB’s Weidmann and Centeno, as well as the Fed’s Kaplan, Barkin, Bostic and George.

Market Snapshot

  • S&P 500 futures unch at 3,579
  • STOXX Europe 600 up 0.4% to 389.26
  • German 10Y yield rose 0.2 bps to -0.569%
  • Euro down 0.09% to $1.1864
  • Brent Futures up 0.4% to $44.38/bbl
  • Italian 10Y yield fell 1.3 bps to 0.53%
  • Spanish 10Y yield rose 0.2 bps to 0.072%
  • MXAP up 0.3% to 188.39
  • MXAPJ up 0.4% to 622.59
  • Nikkei down 0.4% to 25,527.37
  • Topix up 0.06% to 1,727.39
  • Hang Seng Index up 0.4% to 26,451.54
  • Shanghai Composite up 0.4% to 3,377.73
  • Sensex up 0.8% to 43,944.99
  • Australia S&P/ASX 200 down 0.1% to 6,539.17
  • Kospi up 0.2% to 2,553.50
  • Brent Futures up 0.4% to $44.38/bbl
  • Gold spot up 0.08% to $1,867.97
  • U.S. Dollar Index up 0.03% to 92.32

Top Overnight news from Bloomberg

  • The U.K. hasn’t moved sufficiently to overcome the three main obstacles to a trade deal, European Union negotiators told envoys from the bloc’s 27 governments
  • BioNTech SE and Moderna Inc. could receive conditional European Union marketing authorization for their Covid-19 vaccines in the second half of next month, according to the head of the EU’s executive arm, putting the bloc on track to start distributing the shots at the same time as the U.S.
  • A rally in global credit markets sparked by unprecedented stimulus since the start of the pandemic will be tested by the prospect of Federal Reserve backstops ending
  • Time is running out for the financial industry to ditch the scandal- tainted Libor benchmark, a panel of the world’s top regulators warned Friday
  • U.K. government borrowing climbed to a record 214.9 billion pounds ($286 billion) in the first seven months of the fiscal year, underscoring the tough choices facing Chancellor Rishi Sunak as he prepares for a major announcement on spending next week

A quick look at global markets courtesy of NewsSquawk

Asian equity markets traded with a non-committal tone as participants reflected on the choppy price action stateside where concerns regarding COVID-19 restrictions lingered and although reports of congressional staffers were meeting to discuss the omnibus spending package and coronavirus relief, provided tailwinds for the major indices heading into the closing bell, the advances in US futures were eventually wiped out after hours. This was following a request by US Treasury Secretary Mnuchin for the Fed to return unused CARES Act funds to the Treasury and decision to shelve several programs that utilize those funds including the Main Street Facility, Term Asset-backed Facility, Primary and Secondary Corporate Credit Facilities and the Municipal Liquidity Facility, which in turn prompted a dissenting response from the Fed which would prefer to continue with the full suite of emergency facilities to support the economy. ASX 200 (-0.1%) was kept afloat for most the session amid strength in tech and with financials also positive as CBA shares welcomed APRA’s decision to reduce the lender’s operational risk capital add-on, although IAG remained the worst performer after it flagged a post-tax provision of AUD 865mln due to the recent NSW court ruling. The index then gradually faltered and closed in the red weighed by weakness in the commodity sectors, while Nikkei 225 (-0.4%) underperformed following recent fluctuations in the currency, a spike in COVID-19 infections and with inflation data remaining in negative territory for a 3rd consecutive month. Hang Seng (+0.4%) and Shanghai Comp. (+0.4%) eked tentative gains amid broad indecision after the PBoC maintained its Loan Prime Rates as expected and continued to drain liquidity from the interbank market, while several mid-cap banking names were under pressure including China Everbright Bank and Industrial Bank Co. after reports China’s bond market regulator plans to conduct investigations on lenders involved in the bond issuance of the state-owned coal miner which recently defaulted. Finally, 10yr JGBs eked mild gains amid the underperformance in Japanese stocks and strength in T-notes after the Treasury asked for its funds back from the Fed, but with upside capped amid the enhanced liquidity auction for 2yr, 5yr, 10yr and 20yr JGBs which showed relatively inline results with the prior.

Top Asian News

  • Japan’s Record Covid Cases Stoke Economic Double-Dip Concern
  • Hong Kong Virus Cases Surge Again as City Sees ‘Fourth Wave’
  • Fosun’s Unit Rallies on Debut After Biggest India Pharma IPO

European equities (Eurostoxx 50 +0.6%) trade with modest gains in the final trading session of the week with the selling seen late yesterday in the US failing to have much bearing on today’s European session. US futures are more despondent than transatlantic peers, but ultimately mixed/flat, in the wake of yesterday’s news that US Treasury Secretary Mnuchin has requested that the Fed returns unused CARES Act funds to the Treasury and decided to shelve several programs that utilize those funds. This in turn prompted a dissenting response from the Fed which would prefer to continue with the full suite of emergency facilities to support the economy. Additionally, reports that congressional staffers are set to meet to discuss the omnibus spending package and coronavirus relief were later tempered by Fox’s Pergam who noted that talks will likely be on appropriations and not necessarily a coronavirus stimulus bill. Performance for US futures in the pre-market has seen the ES lower by 0.2%, whilst the tech-heavy e-mini NASDAQ fares better and is largely unchanged while the e-mini Russell lags with declines of 0.2%. Gains across European indices are relatively broad-based, whilst sectors trade mostly firmer, albeit modestly so. Basic resources and oil & gas names sit near the top of the leaderboard in what has been a relatively sparse morning of corporate updates for the region. Thyssenkrupp (+5.4%) is the best performer in the Stoxx 600 thus far, however, this is more a paring back of some of yesterday’s heavy declines seen in the wake of its FY earnings. BAE Systems (+3.7%) trade higher once again in the wake of yesterday’s budget announcement from the UK Department of Defence. To the downside, Sage (-13.5%) sit at the foot of the Stoxx 600 after FY results underwhelmed, whilst Royal Mail (+0.3%) pullback from recent earnings inspired gains.

Top European News

  • EU Leaders Are Urged to Step Up Preparations for No-Deal Brexit
  • Only the Best London Offices Thrive in an Emerging Covid Divide
  • Billionaire Leader Gives Czechs a Tax Cut Against Virus Pain

In Fx... Well that didn’t last long in terms of a revival, as the Buck retreats from Thursday’s recovery high having posted its first firmer close for 7 trading days in DXY terms and the index now hovering below 92.500 again within a lower 92.411-201 range. A late squeeze on Wall Street following reports that congressional staffers were discussing a spending bill, including further COVID-19 fiscal support, knocked the Greenback off its perch initially, and renewed pressure continued when it emerged that the Fed rebuffed a request from US Treasury Secretary Mnuchin to hand back untapped CARES Act funds. Some subsequent respite for the Dollar amidst fragile risk sentiment and specific issues/factors keeping rival currencies in check or depressed.

  • NZD/AUD – As noted at the outset, Kiwi outperformance goes somewhat against the grain as major counterparts remain largely confined, but the rebound in Nzd/Usd to revisit recent highs above 0.6900 looks mainly due to favourable crosswinds as Aud/Nzd gravitates closer to 1.0500 and the Aussie fails to sustain momentum on the 0.7300 handle despite more upbeat data (retail sales much stronger than expected in line with the latest labour metrics).
  • GBP – The Pound is holding up relatively well, all things considered, though like Aud/Usd, Cable has not gleaned traction from another month of UK consumer excesses as the ONS noted early seasonal buying and retail discounting as mitigating reasons for the bumper activity. Instead, Sterling bulls seem to banking or betting on positive Brexit news as trade negotiations carry on remotely and intensely between UK and EU representatives. However, latest word from Brussels via an EU envoy is that fishing, state aid and a level playing field are still unresolved due to a lack of movement on the British side. Cable is pivoting 1.3275 at present and Eur/Gbp is choppy either side of 0.8950.
  • CAD/JPY/CHF/EUR – Completing the set, Canadian retail sales could be more compelling for the Loonie compared to new home prices, as Usd/Cad trades towards the base of a 1.3051-88 band, but for now an unusually large option expiry at the 1.3100 strike (1.1 bn) appears intact. Conversely, the Yen may yet be drawn to similar size at 104.00 (1 bn) after several thwarted attempts to extend gains through Fib resistance protecting 103.50 of late in wake of weak Japanese CPI prints, while the Euro looks boxed in given decent expiries at 1.1850 and 1.1900 (1.1 bn and 1.3 bn respectively) not to mention the ongoing EU Budget and Rescue Fund stand-off or dovish ECB vibes. Elsewhere, the Franc remains tethered to 0.9100 and 1.0800 vs the Euro following several false breaks and ever wary of SNB presence.
  • EM – The Lira was already consolidating after respecting resistance circa 7.5000 on the back of yesterday’s aggressive CBRT tightening move when Turkish President Erdogan repeated his controversial higher rates spur inflation view and Usd/Try retraced a bit further in response having mostly ignored another hike in swap rates and a decline in consumer sentiment. Nevertheless, the pair has pared back from around 7.6160 as he seemed to accept the hike as a bitter pill to combat above target CPI and reiterated efforts to restore investor confidence in the Lira.

In commodities, crude futures are modestly firmer this morning and have recouped the Treasury/Fed inspired downside just after the US equity close yesterday. Currently, WTI and Brent are firmer by around 1.0% and remain in relative proximity to the day’s peaks of USD 42.28/bbl and USD 44.70/bbl respectively. Much of this upside occurred in a mid-European morning spike with gains accelerating from ~0.5% firmer to the current +1.0% performance, such upside coincided with the continued grind higher in equities and notably with US futures moving in proximity to U/C for the session. Fundamentally, once again newsflow explicitly for the complex has been sparse with the broader macro narratives continuing to dictate things; a trend which may well remain in play until the month-end OPEC+ gathering; following this week’s JTC/JMMC events. Moving to metals, spot gold is essentially unchanged on the session and has meandered within a relatively tight USD sub-10/oz range since the European equity open. Separately, the weekly BofA flow show report highlights that over the last week gold saw its largest ever outflow totalling USD 4bln amid record inflows into equities across a two-week period.

US Event Calendar

  • Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

Talking of forecasts, one of the worst predictions I made around the time of the GFC a decade ago was that we might be at “peak TV”. I’d just binged watched the whole of the Supranos and The Wire in a few months and really thought TV couldn’t get much better. About 150 box sets later and it’s fair to say that they would still be near the top but with an awful lot of good series since. Indeed if you’re looking for inspiration tonight we are due to finish “The Queen’s Gambit” on Netflix which is a drama about Chess! It’s very very good but if you’d told me 20 years ago that my future Friday night self would have been desperately looking forward to watching Chess on TV I may have asked you to get me checked over. Then tomorrow we start the new series of “The Crown” and on Monday night the latest episode of “The Undoing”. It’s fair to say that peak TV has been a pretty long plateau.

If we’re at peak S&P 500 the market isn’t going down without a fight as a late stay-at-home fuelled rally took the index back in positive territory and up +0.39% for the day. However equities in Europe earlier lost ground and the more cyclically-oriented STOXX 600 was down -0.75%. Tech stocks outperformed on both sides of the Atlantic, with the NASDAQ ending the session +0.87% higher. That was in part thanks to Tesla, which surged a further +2.60% yesterday to reach a new record high, and bringing its gains over the last 3 sessions to a massive +22.34%. At current market cap it will enter the S&P 500 in December in eighth position.

The late rally was also helped by news that Speaker Pelosi and Senate Minority Leader Schumer are working with Congressional Republicans on a spending bill that would avoid a Dec. 11 government shutdown. While there is no indication that there would be work on fiscal stimulus as well, some reports indicated that members of both parties were open to getting some level of stimulus through. Elsewhere in US politics, on Tuesday we wrote that Fed Chair Powell leaned towards keeping the Fed’s emergency lending facilities operation as is, given that the “recovery is incomplete”. However the power to renew them sits with Treasury secretary Mnuchin and late last night he requested that the Federal Reserve return all unused stimulus funds to the Treasury Department. Mnuchin did say that in the “unlikely event that it becomes necessary in the future to reestablish any of these facilities”, the Fed can seek approval again. 10yr treasuries fell another -2.6bps after these headlines. Mnuchin also said overnight that Congress should seriously consider redirecting the unspent stimulus funding ($580bn was the number he used), including money he’s pulling back from the Federal Reserve, to buoy the economy as the U.S. waits for a vaccine.

Following Mnuchin’s request, the Fed has urged the administration overnight that “the full suite” of facilities be kept in place. So a rare public discord between the two sides which is helping to push S&P 500 futures down -0.45% this morning (down as much as -0.90% earlier). Asian markets are trading mixed with the Nikkei (-0.43%) and ASX (-0.12%) down while the Hang Seng (+0.35%) and Shanghai Comp ( +0.11%) are up. The Kospi is trading broadly flat. In terms of overnight data releases, Japan’s preliminary November PMIs came in weaker than last month with manufacturing at 48.3 (vs. 48.7) and services at 46.7 (vs. 47.7) bringing the composite to 47.0 (vs. 48.0).

Meanwhile, here in the UK, Bloomberg reported that Chancellor of the Exchequer Rishi Sunak is set to squeeze public sector pay for millions of workers as he seeks to rein in government spending. However, health care workers will likely be exempt and the announcement will form part of a spending review that the chancellor will deliver next Wednesday. The Centre for Policy Studies, a conservative think-tank, highlighted that a 3 year pay freeze for all public sector employees would save GBP 23bn while, exempting the NHS staff would cut the savings to GBP 15.3bn.

Back to markets and sovereign bonds performed well yesterday. 10yr Treasury yields in total fell -4.1bps to 0.829% and helped by the late Fed/Treasury spat, while 10yr yields on bunds (-1.7bps), gilts (-1.4bps) and OATs (-1.5bps) similarly fell. The US dollar also lost ground, with the dollar index dropping slightly (-0.02%) to make it a run of 6 successive declines. Once again, the major action was over in Bitcoin however, which was up a further +0.90% to $17,946 yesterday, as the cryptocurrency strengthened for a 4th successive day. The move brings it yet closer to its all-time closing high back in December 2017, when it reached $19,042. Conversely, gold lost ground for a 4th consecutive session, with the precious metal falling a further -0.30% to $1,867/oz.

We also got decent news on vaccine approval yesterday with the EU indicating that BioNTech/ Pfizer and Moderna could receive conditional European Union marketing authorisation for their Covid-19 vaccines in the second half of December. We also heard from Bill Gates overnight and he said that Astra Zeneca should get UK approval soon and was pleased that it had seemingly generated a high immune response. Andrew Pollard, Oxford’s chief trial investigator has said that Astra and Oxford will immediately release the “high-level” results of the trials once they pass the infection benchmark of 53 confirmed Covid-19 cases. Notwithstanding the pause in its trials earlier, the delay in reporting results might indicate a high level of efficacy as it might be taking longer for people to get infected in the company’s Phase 3 study.

In terms of the latest Covid case developments, case numbers have shown some signs of levelling off in many European countries, though there’s no sign of any let-up in the amount of restrictions anytime soon. Indeed, the Dutch government announced yesterday it would make face masks compulsory in indoor public spaces from the start of December. Croatia, one of the few European countries that have been able to put off a second lockdown, announced yesterday that it would tighten measures once again, primarily limiting hours for restaurants and bars as well as urging more work-from-home.

Meanwhile in the US, NYC Mayor de Blasio said that it was “just a matter of time” before indoor dining was stopped in the city, as they grapple with a renewed rise in cases that has already seen their public school system shut which caused the mini risk-off from Wednesday afternoon US time. Governor Cuomo increased restrictions across the state, with the worst positivity rates currently in the western part of the state. On the other side of the country, the Governor of California imposed a curfew that affects 94% of the population in the state from between 10pm and 5am starting this weekend. President Trump’s Coronavirus Task Force held its first press briefing yesterday at the White House since April as the cases and hospitalisations continue to surge to record highs in regions across the country. Dr Fauci again urged a national effort to slow the spread offering the optimism of a potential vaccine on the horizon. The task force again noted they are not in favour of a national lockdown but emphasized “mask wearing, social distancing, avoiding congregant settings, doing things to the extent that we can outdoors versus indoors.”

Across the other side of world, South Korea has urged citizens to stay home and cancel gatherings while the government will minimise face-to-face meetings from next week as new infections in the country are on a rise. Japanese PM also sounded an alarm as he said that the country should be on highest alert over the virus. In some better news, South Australia said that it will lift the lockdown early and immediately allow outdoor exercise, amid early signs its cluster of Covid-19 infections is being contained.

Covid also managed to find its way into the Brexit negotiations, where the main development yesterday was that the talks were put on hold after one of the negotiators in the EU team tested positive for the virus. That isn’t the best news on the timing front, since there are just weeks remaining now until the conclusion of the transition period at the end of the year, when the UK leaves the EU’s single market and customs union, and there’s still no agreement on a trade deal. Earlier this week, there had been reports that the breakthrough could come as soon as early next week, meaning there’d be enough time for the text to be translated and ratified. Obviously the latest developments won’t be helping to speed things up however. Barnier was meant to be addressing the EU Ambassadors meeting today but one of his deputies will attend instead. It’ll be interesting to see if this generates headlines.

During a EU leaders’ videoconference yesterday French President Macron and Belgian Prime Minister De Croo asked their counterparts to start contingency planning for a no-deal separation with the UK. Also on the call Hungary and Poland kept to their veto of the $2 trillion stimulus agreed to by leaders back in July. The Polish premier Morawiecki indicated that the conditioning disbursements from the group’s economic recovery fund to rule-of-law conditions would not be in line with EU treaties. EC President Michel, who chaired the meeting, said the commission would work toward a compromise, without elaborating on specifics.

Wrapping up with yesterday’s data, the weekly initial jobless claims from the US ticked up to 742k (vs. 700k expected) in the week through November 14, moving back up from the post-pandemic low of 711k the previous week. That said, the continuing claims for the week through November 7 were slightly better than expectations, at 6.372m (vs. 6.4m expected). Otherwise, existing home sales rose to an annualised rate of 6.85m (vs. 6.47m expected), which is their highest level since 2005.

To the day ahead now, and the data highlights include UK retail sales and public finances for October, along with Germany’s PPI. As well as this, we’ll get the Euro Area’s advance consumer confidence reading for November, and Canada’s September retail sales. Central bank speakers include ECB President Lagarde, Vice President de Guindos, and the ECB’s Weidmann and Centeno, as well as the Fed’s Kaplan, Barkin, Bostic and George.