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More smoke than fire between Fed and Treasury

Financial markets do not like it when politicians quarrel. The services sector is suffering from the renewed lockdown, and still the EU is not able to implement the much-needed fiscal stimulus package. There is still an argument going on about the outcome of the US presidential election, but time is getting tight for coming up with a temporary budget deal to avoid the next government shutdown.

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Against this backdrop, the news that the US Treasury is demanding money that has been reserved for bond purchases back from the US Federal Reserve (Fed) stirred some waves. Things look different when looked at from the right angle. We have all heard time and again that targeted fiscal measures are the best instruments to stimulate demand in today’s world of low interest rates and excessive capital. It therefore makes sense for Treasury Secretary Mnuchin to seek to reappropriate funds the Fed is not deploying accordingly. And we all know that politicians tend to agree in the very last minute only to underscore how hard they are fighting for their electorate. We will have to wait for the EU budget and the US compromise, but do not lose confidence.

‘Confidence’ is a good word to use in association with vaccines at present. It feels like we have had to wait a very long time for positive data, disregarding all the scientists’ claims that they were working at a record pace. Now good news is being announced weekly. We still do not know how the ski season will look, but it is more certain than ever that we will have sufficient vaccines by summer. This underscores our positive assessment of the economy from summer 2021, for which we recommend financial stocks. Metal prices have already discounted too much good news, in our view, and we keep the powder dry there. The central bank of Turkey delivered hard facts last week, raising interest rates massively. We upgrade the country to Neutral. As long as Turkey is the exception and not the rule when it comes to rate setting, however, we prefer emerging market hard-currency bonds.