Why investors shouldn’t count on another big stimulus package
The prospect of US lawmakers producing another big stimulus package before the election has tantalized investors for months. But there are good reasons to think additional relief won’t arrive anytime soon.
The Dow closed down 1.4% on Monday as the 48-hour clock on stimulus negotiations imposed by House Speaker Nancy Pelosi ticked down without a major breakthrough. The S&P 500 lost 1.6% and the Nasdaq shed 1.7%.
Pelosi is putting pressure on the administration to cut a deal by Tuesday evening because it won’t be feasible to get a bill passed through both the House and Senate by Election Day on November 3 if the talks drag on.
Pelosi has been negotiating with Treasury Secretary Steven Mnuchin for months, and the two sides are getting closer to a deal. But that doesn’t mean there will be enough votes in the Senate for another big stimulus package.
Democrats have been pushing for a relief bill with a price tag of more than $2 trillion. But that’s simply too much money for Senate Republicans, who favor a much smaller plan that includes around $500 billion in relief.
Sen. John Thune of South Dakota, the Republican responsible for rounding up votes from his colleagues, said that even if a big stimulus package was passed out of the House, it would be hard to find enough votes to cross the 60-vote threshold for advancing legislation in the Senate.
“I mean I think we’re gonna have a hard time finding 13 votes for anything that is very big,” Thune said, a reference to how at least 13 Republicans would need to sign on with all 47 members of the Democratic caucus.
Republican Sen. Ron Johnson of Wisconsin threw up his hands when asked about a deal in the neighborhood of $2 trillion and said simply “way too high.”
Federal Reserve Chairman Jerome Powell has called on lawmakers to pass additional stimulus, warning that the US economic recovery has a long way to go.
Investors can expect more volatility as negotiators in Washington make one final push for a potential deal.
Sebastien Galy, a senior macro strategist at Nordea Asset Management, said that equity markets are coming under pressure because of limited progress in talks and the risk of a deal being rejected by Senate Republicans.
“The odds of a deal being low, this tells us much about the battle between hope and the reality of an economy still under severe shock but recovering,” he said in a research note.
If negotiations fall apart, there’s likely to be a short-lived stocks selloff, according to Jeffrey Halley, a senior market analyst at Oanda.
“With the US presidential debate … and Covid-19 confirms increasing rapidly in Europe … a sustained rally by equities from here will be challenging, even if a US stimulus package comes through at the last minute,” he said in a research note.
UBS powers through the pandemic
UBS is returning billions of dollars to shareholders and reporting a huge profit surge even as the pandemic continues to ravage the global economy, my colleague Hanna Ziady reports.
The world’s largest wealth manager said in a statement Tuesday that third-quarter net profit nearly doubled to $2.1 billion compared to the same period last year. The strong result was driven by a boost to trading income in its investment banking division amid choppy markets and the sale of a majority stake in its fund distribution platform Fondcenter.
The bank also grew revenue in its core wealth management division, which reported record profits in Asia and the United States. Shares in the bank increased 2.8% on Tuesday.
UBS is setting aside $2.5 billion to return to shareholders next year in the form of a dividend and share buybacks. It also plans to pay the second installment of its 2019 dividend next month, after regulators asked European banks to delay shareholder payouts heading into the pandemic.
A second wave of coronavirus cases now threatens to derail Europe’s fragile recovery heading into the final quarter of the year. That could increase pressure on lenders, which have already set aside billions of dollars to cover bad debts as they brace for one of the worst global recessions on record.
UBS acknowledged that recent increases in coronavirus cases in Europe “create renewed uncertainty” and make “reliable predictions difficult.”
But the bank said that the majority of its credit exposures are of “high quality” and it expects credit losses in the fourth quarter to remain “markedly lower” than in the first half of the year.
UBS recorded credit losses of $89 million in the third quarter, a significant reduction on the $272 million recorded between April and June.
ConocoPhillips goes big on fracking
Despite the gloom-and-doom in the oil industry and the specter of a blue wave in Washington, ConocoPhillips is doubling down on crude by making a major acquisition.
Conoco on Monday announced a $9.7 billion all-stock takeover of Concho Resources, a fracker squarely focused on the Permian Basin, the massive West Texas oilfield at the heart of the shale revolution.
The companies said the deal will make the new Conoco the largest independent oil-and-gas company in the United States, with daily production surpassing 1.5 million barrels.
But it will also make Conoco even more exposed to the same forces that have swiftly moved against fossil fuels, reports my colleague Matt Egan.
“It is a bit of a contrarian move to double down on oil and gas at a time when it’s unpopular in the investment community,” said Pavel Molchanov, energy analyst at Raymond James.
The industry could also become unpopular in Washington depending on what happens in next month’s election. If Democrats sweep the White House and Congress, new regulations targeting fossil fuels could be on the way.
Joe Biden has proposed banning new oil and gas permitting on public lands and waters. Biden has also laid out a $1.7 trillion climate plan focused on clean energy and set a goal of net-zero emissions by no later than 2050.
Lockheed Martin, Procter & Gamble and Philip Morris International report results before US markets open.
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- US housing starts and building permits data are out at 8:30 a.m. ET.