Wall Street Close: Stocks drop into close as markets await what Biden has instore

• US equity markets came under selling pressure in the cash close, amid what appeared to be a bout of profit taking.
• Fed Chair Jerome Powell’s comments during his participation in an online Princeton University conversation very much stuck to the script.
• Trader attention has now turned to the upcoming announcement from US President-elect Joe Biden.

US equity markets came under selling pressure in the cash close, amid what appeared to be a bout of profit-taking (all three of the major large-cap US indices still trade very close to all-time highs). The S&P 500 closed 0.3% lower and dropped slightly below 3800, the Nasdaq 100 closed 0.6% lower, falling further back from the 13,00 level and below 12,900 and the Dow Jones Industrial Average dropped by 0.2% to below 31,000.

Traders also pointed to rising US bond yields as possibly weighing on the equity markets; US 10-year yields finished the session up 3.9bps to 1.127%. Bad weekly jobless claims data and further restrictions on the ability of Americans to invest in Chinese companies via further executive orders from the outgoing Trump administration are also being cited weighing on sentiment.

Jerome Powell, Chairman of the Federal Reserve spoke (more below). Nothing he said would have explicitly triggered any hawkish market reaction. Rather, bond yields might have been moving higher in anticipation of an incoming stimulus announcement from US President-elect Joe Biden (more below). Note that the Small Cap Russell 2000 surged 3.2%, seemingly continuing to derive support from hopes for stimulus that are set to disproportionately benefit small businesses.

Powell down, Biden incoming

Fed Chair Jerome Powell’s comments during his participation in an online Princeton University conversation very much stuck to the script. The Fed Chair reiterated the bank’s dovish stance on policy and, with regards to the bank asset purchase programme (the tapering of which has been a hot topic as far as markets are concerned as of late), said; the Fed needs to be careful about how it communicates about asset purchases, that any tapering is still a long way off and when the Fed does finally decide it wants to move towards tapering off asset purchases, this will be flagged well in advance.

Trader attention has now turned to the upcoming announcement from US President-elect Joe Biden, who is expected to unveil a $1.9T fiscal stimulus package plan, according to the latest reports. Separate reports suggest the plan will include new $2000 direct payments, as well as significant new child benefits. For any fiscal stimulus bill to be able to pass the Senate without being filibustered it needs to get 60 votes, meaning 10 Republicans will have to vote in favour. Biden is said to want to make a deal with the Republicans, meaning this $1.9T number could significantly drop. However, there is an option to bypass any Republican filibuster attempt by pivoting to a parliamentary process called budget reconciliation, which means they would only require 51 votes (which the Senate Democrats have when Vice President-elect’s vote is counted on).