McConnell Stimulus Warnings: Markets Awaiting Breakthrough

Written by: Craig Erlam | OANDA Europe

Stock markets have dipped as the European morning has progressed, with US futures now a little flat ahead of the open as negotiations hit a critical stage in the US and Europe.

There's been an incredible confidence in these markets that a deal will be reached in both cases and the downside risks just don't seem to be being factored in. Perhaps Mitch McConnell's recent warnings to the White House about making a deal before the election are weighing a little today, with the Senate being the main barrier to an agreement.

Of course, the White House may be confident it can get the votes in the Senate to get a deal over the line and Trump may be willing to ignore the warning's of McConnell if he thinks it could get him a second term. The real fight may not be between the White House and House Democrats after all, rather the President and Senate Republican's as the election looms.

The end is in sight for Brexit

Here in the UK we're hearing the same old tiresome rhetoric from London and Brussels as both sides continue to play hardball in an attempt to draw out some final concessions. The same differences remain and it's only a matter of time until both sides return to the negotiating table. This looks more like a PR stunt at this point, with each wanting the other side to be seen to be backing down. Times like this make me glad the deadline is the end of the year.

The reality is that both will have to make concessions if they want a deal, which they both need far more than they claim. That would be the case if we weren't in the midst of a pandemic. The rest of us are forced to watch it unfold like a dreadful TV drama and just hope there won't be a shocking plot twist in the season finale.

Oil building momentum as highs tested

Oil prices are slipping a little again on Wednesday, off just over 1%, having risen close to their range highs again yesterday. WTI came within a whisker of $42 and, despite today's pullback, seems to have momentum on its side. An overconfidence, perhaps, that a stimulus deal will be reached and that OPEC+ has the markets back, despite passing up the opportunity this week to delay two million barrels of production restarts from January.

Of course, they can pull the trigger on that delay at any point and they meet again in December which may be a better time to announce such a move. By then they'll know who the US President is going to be for the next four years, how bad the second wave is and how quickly Libya is ramping up production, for example. Still, this confidence in the markets remains overly optimistic and signficant risk lies below, as a result.

Bullish momentum growing for gold

Gold has been choppy for days and has barely progressed in either direction, much like the talks in Washington. There is slightly more optimism that a deal will be reached between Mnuchin and Pelosi as the White House ups its offer again in a bid to tempt the House Majority Leader into a deal, which is weighing on the dollar and providing some support for the yellow metal.

There is still some hesitancy though, with gold once again running into some resistance around $1,920 where we're once again seeing some profit taking. Once again, the bulls appear to have momentum on their side while the bigger risks remain below if a package isn't agreed. A significant move above $1,930 or below $1,880 could trigger a significant breakout from the consolidation we've seen recently.

Related: Stimulus Hope: Deal Making Time