The 1$ trillion relief plan was informally agreed by the White House and the Republicans which includes an extension of the unemployment benefits for up to 70% of salaries and is set to replace the current package that expires on 31st of July. The formal agreement is expected to be announced post UK market close today. The positive development is that the proposed relief plan excludes payroll cuts which the Democrats opposed so this variable increases the chances that it will be eventually be passed and may even reach 1.3$trillion. Senate goes to recess on the 7th of August which is when most investment houses expect the deal will be passed while it is unlikely to meet the 31st of July deadline of the previous plan.
The other main focus for the week will be the Fed meeting where a dovish tone is expected especially because the pace of the US economic recovery is slowing as the COVID19 infection rates surged in the past weeks. Although policy announcements are not expected until the conclusion of the policy framework in September the dovish stance will help boost investors’ sentiment that the Fed stands ready to act in a worsening economic scenario. Discussion on YCC and the weakening dollar may take effect with no firm action expected for the former.
COVID19 infection rates slowed in the sunbelt states while Europe is experiencing a resurgence of cases in Spain, Germany, Eastern Europe. As we have experienced in the States the past month where the spike in infections was of particular concern, the markets remained largely unaffected as the support of the Central banks and governments keeps investors optimism strong. So unless we see the resurgence of the virus feeding into the macro economic indicators, risky assets should continue to be bid.
The weakness of the dollar i.e. versus the euro is catching the focus of the markets and the trend could be backed by a number of factors. The EU recovery fund is one support element for the euro as its timing was ahead of market expectations and as it reflected fiscal union amongst the members and the willingness to help the most affected countries recover from the underlying economic damage. The other obvious support element is the obvious fact that China and Europe better handled the COVID19 virus outbreak and will thus more likely to have a swifter recovery.
Analysts are recommending US assets that have revenue exposure to Europe, China and Asian countries with solid handling of the pandemic. General research continues to be bullish on peripheries over the summer months due to the seasonality effect and the general support framework i.e. Recovery Fund, ECB buying, TLTRO liquidity. With core rates supported by central banks and thus trading range bound, and with risky assets remaining bid, we should continue to see spreads tighten.