Are Markets Too Complacent?

US

• USD PPI 8:30

Markets were in a dour mood on the last trading deal of the week with hope for deals squashed on both sides of the Atlantic as stock index futures were lower by 1% while the dollar firmed across the board but especially against the pound.

In Europe all indications are that the final round of Brexit talks are failing as both sides remain apart on key issues of regulatory uniformity and both PM Johnson and President von der Leyen have started to prepare their respective constituents for a possible no deal break up.

Cable was off by more that 100 pips breaking below the 1.3200 figure but price action suggests that traders are still hopeful for some sort of compromise as the decline has been orderly. The nonchalance of the market is perhaps the function of many false warnings from the past as markets are used to the deadline being constantly pushed back.

This time however, the story may be different. Although all outside experts agree that both parties are literally 97% towards a deal and everyone universally feels that an economic divorce would be a catastrophe for both the UK and the EU political considerations stand in the way and the UK may be willing to walk away from a unified market for the price of sovereignty.

Meanwhile in the US talks are also bogged down on the “interim” fiscal package with Senate Republicans stating that they have no majority votes for the bill as it currently stands because it does not provide corporations with indemnification against COVID lawsuits. If the bill is indeed scuttled in legalistic grounds the market reaction is likely to be far more negative. With equities already at record highs due to low yields and assumption of fiscal stimulus, the news of no additional income support just as the US hits 300,000 dead and sees vast stretches of it land under lockdown provisions combined with the fact that provisions against eviction are about to expire is likely to create a highly toxic economic and political environment that will begin to hit the revenues of consumer facing businesses first.

For now equity traders just like their FX brethren remain nonplussed by the news, but indices resting near record highs the prospect of a downward surprise could quickly collapse prices and create panic that could feed upon itself just ahead of the holiday season.