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What’s next for the markets after Finance Minister Steven Mnuchin pulls the plug on $ 455 billion



After markets closed Thursday, Finance Minister Steven Mnuchin surprised the financial world, saying he would not extend authority beyond the end of the year for the Federal Reserve to stop corporate credit as well as Main Street and municipal lending programs. Mnuchin asked that the Fed return the unused capacity of approx. $ 455 billion to the Treasury.

The Federal Reserve quickly issued a statement saying it “prefers that the full package of emergency facilities set up during the coronavirus pandemic continue to serve their important role as a backstop for our still strained and vulnerable economy.” Fed Chairman Jerome Powell had on Wednesday announced that the programs should continue.

The intent of the Mnuchin movement appears to be to prevent the next finance minister, who extends relief to state and local governments, and had been urged by Senator Pat Toomey, the Republican senator from Pennsylvania who is nominated to chair the Senate Banking Committee , unless Democrats win both runoff elections in Georgia in January.

Mnuchin̵

7;s own letter explained the firepower of these facilities and how they helped lower interest rates on a variety of instruments.

“Mnuchin’s move will tighten economic conditions and remove a market safety net at the wrong moment,” said Krishna Guha and Ernie Tedeschi, analysts at Evercore ISI. “One side effect is that it increases the likelihood of FOMC [Federal Open Market Committee] will strengthen QE [quantitative easing] in December with additional duration and guidance, and if things get bad enough, a faster pace of buying too. However, QE is a very imperfect substitute for a backstop in the credit market. ”

“The risk is diverse, including rising interest rates for struggling companies, limited access to credit for small and medium-sized enterprises and worsening financial difficulties for budget-constrained municipalities,” added Gregory Daco, chief economist at Oxford Economics. “If the financial markets perceive the Fed’s position as significantly weakened, weaker economic activity and the prospect of expiration of foreclosure and foreclosure, termination of student loan repayment, and 12 million unemployed people losing their benefits by the end of the year could lead to a tightening. economic conditions. ”

The Mnuchin letter pointed out that the Fed could use so-called ESF core funds, a reference to the currency stabilization fund designed to fund any action to intervene in the foreign exchange markets if a facility was needed to be restored. However, Evercore analysts point out that there are only approx. 10 billion Dollars in government securities in this fund, though the Fed could swap International Monetary Fund special drawing rights to expand capacity.

Andrew Hollenhorst, US chief economist at Citi Research, said these backstops were not used much in recent months. “The direct market impact should therefore be limited, although the prices of risk assets are withdrawn due to the indirect effect of a less fixed backstop. The treasury return fell, partly on risk-off, but also because the release of government capital would mean less government debt issuance, ”he said.

There will be more fireworks in the future – Powell and Mnuchin will testify before the House Financial Services Committee on December 2 on overseeing the pandemic response of the Treasury Department and the Federal Reserve. House Financial Services President Maxine Waters, a California Democrat, made no secret of her feelings about Mnuchin – “he will be held accountable for this legally dubious and overtly destructive recommendation.”

The hum

There will be plenty of opportunity for more reaction to the Treasury news with public engagements from four regional Fed presidents. On a related note, President-elect Joe Biden said he has chosen his candidate to become the next finance minister and will announce the decision either just before or just after the Thanksgiving holiday next week. Politico said Biden’s description of his choice of a person who can appeal to all wings of the Democratic Party points to former Fed chief Janet Yellen.

California announced a new curfew that was to start Saturday in response to growing cases of coronavirus in the largest U.S. state by population. The United States set a record on Thursday for both new cases and hospitalizations, according to the COVID tracking project.

A meeting of the European Union could not resolve Hungary’s and Poland’s veto over the 750 billion recovery fund €. European Commission President Ursula von der Leyen said separately that the vaccine from drug manufacturer Pfizer PFE,
-0.35%
and partner BioNTech BNTX,
+ 4.96%,
as well as that of biotechnology Modern MRNA,
+ 4.36%,
could get legislative approval in the latter half of December. Pfizer and BioNTech said they would submit approval to the U.S. Food and Drug Administration for emergency approval on Friday.

Gilead Sciences GILD,
-0.44%
fell 1% in intra-market trade, which the World Health Organization recommended against doctors who used the drug remdesivir to treat coronavirus patients.

Cybersecurity providers FireEye FEYE,

jumped 14% after announcing a $ 400 million investment from a Blackstone-led group that it will use to fund a $ 186 million acquisition of an automation company for cybersecurity investigations.

Williams-Sonoma WSM,
+ 3.99%
rose 7% after the home equipment retailer announced stronger-than-expected earnings and revenue in its fiscal third quarter. Post Holdings POST,
-0.43%
fell by 7% after the grain producer reported worse-than-expected results.

The markets

Following the fourth highest closing in the history of the S&P 500 SPX,
+ 0.39%
Thursday, US stock futures ES00,
-0.03%

NQ00,
+ 0.17%
was sluggish with Dow industrials futures YM00,
-0.10%
down 35 points.

The yield on the 10-year Treasury TMUBMUSD10Y,
0.830%
was 0.83%. Gold futures GCZ20,
+ 0.19%
emptied up.

SPDR Bloomberg Barclays High Yield Bond ETF JNK,
+ 0.35%
will be a way to monitor how the lack of a Fed backstop affects the most sensitive part of the corporate bond market.

The diagram

Doug Kass, chairman of hedge fund manager Seabreeze Partners Management, highlights this chart from Swiss fund manager Pictet, which shows that the price for sales outside the financial sector is at the 100th percentile of its historical distribution over four decades of statistics is registered. Kass says he is short-circuiting stocks, despite growing bullish comment from seller strategists. “Price is what you pay, value is what you get,” he acknowledges.

Random readings

The BBC said it would not play the original version of “Fairytale of New York” this Christmas on one of its radio stations so as not to offend younger listeners.

Leonardo da Vinci’s drawings contain an “unexpected diversity of bacteria, fungi and human DNA”, but not from the Mona Lisa painter himself.

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