Stocks rally following US infrastructure bill announcement
- A bipartisan group of US senators reached an agreement on US President Joe Biden’s infrastructure bill
- Mr Biden’s US infrastructure bill is worth USD 1.2TN
- Stock markets are outperforming in the wake of the news
- UK housing market booming, but concerns have been raised
Global stock markets are surging towards record highs in the wake of an announcement from a bipartisan group of US senators, who confirmed that a framework had been agreed upon for the all-important infrastructure bill.
Investors have been looking to US President Joe Biden‘s US infrastructure bill to extend the recovery of the US economy, which grew by an annualised rate of 6.4% in Q1 2021.
The news not only raised hopes for a robust US economic rebound but triggered a surge in oil prices and stocks, with the MSCI World Index rising by 0.22% to 534.95 in the wake of the announcement.
Although the MSCI has slipped heading into the North American session, it’s up by nearly 5% on the week.
Stocks were already trading higher before the announcement, courtesy of better-than-expected US labour market data. The number of people filing for unemployment claims fell from 418,000 to 411,000 in the week concluding June 19th.
However, indices rallied after the US President stated that he had received backing for a “Bipartisan Infrastructure Framework.”
US infrastructure bill sends stock markets higher
European stocks surged following the announcement and remain well-elevated. At the time of writing, London’s blue-chip FTSE 100 Index is up by 20.86 points or 0.29% at 7,130.83, while Germany’s DAX PERFORMANCE-INDEX is holding steady at 15,589.49.
Wall Street also points towards another joyous day, with the tech-heavy Nasdaq Composite up 15 points at 14,384.79 and the S&P 500 0.22% higher at 4,275.76.
Oil prices have climbed for the third consecutive session and are on track for another weekly gain, with renewed demand expected to outstrip supply despite concerns raised by OPEC+.
At the time of writing, WTI crude oil is up by 0.48% at USD 73.65 a barrel, while Brent crude has risen 0.25% to USD 75.76.
The improved music mood in financial markets has increased risk appetite and reduced the appeal of the US dollar (USD) on Friday, which is drifting lower across the board.
Although inflationary pressures weigh on risk sentiment, the British pound to US dollar (GBP/USD) exchange rate has reclaimed the USD 1.39 level. Meanwhile, the euro to US dollar (EUR/USD) currency pair has surged by 0.3% to USD 1.1969.
The high-beta Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD) are also outperforming their US rival.
While the US Federal Reserve expects inflation to remain elevated in the near term, a significant rise in the cost of consumer goods could force the central bank to take some unfavourable action, which would weigh on risk-on currencies.
The bipartisan agreement on the US infrastructure bill would have also required US President Joe Biden to sacrifice some of his other plans concerning climate change, tax hikes, and financial support.
However, investors appear to be satisfied with the latest news and the USD 1.2TN (GBP 860BN) infrastructure deal could herald a landmark victory for the US President.
After months of political wrangling, on Thursday, President Biden told US reporters, “we have a deal.”
However, it remains unclear whether the deal will receive enough backing from the Senate, with some Republicans already raising concerns over the infrastructure deal.
After the relatively quick approval of a USD 2TN coronavirus stimulus package, other aspects of Biden’s domestic agenda have been blocked by Senate Republicans, including efforts on police reform and an inquiry into the US Capitol riots.
At one point, it looked like a deal on Mr Biden’s infrastructure ambitions had collapsed after Republican Senate Shelley Moore Capito walked away from talks in early June.
Mr Biden appeared to be unphased by the failed talks as he immediately entered a new round of negotiations with the bipartisan group of senators who had been developing their compromise for an infrastructure deal.
Failure to make headway on the infrastructure bill saw many Democrats accuse Republicans of engaging in “stalling tactics”.
Despite facing criticism and scepticism, Joe Biden’s unrelenting determination to secure a bipartisan deal ultimately led to the agreement, which Mr Biden announced on June 24th 2021.
Although the deal is far from complete, as the US President said its passage would depend on whether a larger spending bill would be approved, financial markets appear to be enthusiastic nonetheless.
Mr Biden is also hopeful and commended the efforts of the bipartisan group, adding that the deal would create “millions of jobs in the United States.”
He added: “We’re in a race with China and the rest of the world for the 21st Century,” he continued, adding: “This agreement signals to the world that we can function, deliver and do significant things.”
The two-step infrastructure plan includes funding for roads, bridges, transit, airports and enhanced infrastructure for broadband, water and electric vehicles.
What does the US infrastructure bill cover?
On Thursday, the bipartisan group of senators agreed to spend USD 973BN over five years and USD 1.2TN if continued for eight years on roads, bridges, public transportation and other physical infrastructure in the United States.
According to a White House statement, USD 109BN will be dedicated to roads and bridges, USD 66BN will be spent on railways, USD 49BN on public transportation and USD 25BN on airports.
An additional USD 73BN will be injected into the electrical grid, while USD 65BN will be used to fund improvements in access to the Internet.
It excludes many of Biden’s ambitions for social infrastructure such as childcare, health and educational provisions and focuses more on physical, organisational structures and facilities.
Still, the White House is confident that the bill will generate a net gain of USD 100BN in additional tax revenue, which will support broader economic growth by boosting investments.
The plan will supposedly neither raise taxes on middle-income Americans nor reverse cuts to business taxes implemented during Donald Trump’s era – a key point of contention from Republicans who had opposed proposals to raise the corporate tax from 21% to 28%.
What is the second condition of the spending bill?
According to the latest reports, President Biden wants another USD 6TN spending package to be approved, covering his ambitions for climate change, education, wage support and childcare.
Senator Bernie Sanders is reportedly drafting a proposal for the bill, which will include tax hikes for the wealthiest individuals and businesses in America.
It would also not require any Republican votes in the Senate but would be subjected to a budget reconciliation process – a special procedure established in the Congressional Budget Act of 1974.
President Biden and US House of Representatives Speaker Nancy Pelosi have stressed that one will not be passed without the other.
In other news, the UK economy continued to roar back in June, but analysts fear that momentum has reached its peak.
UK economy posts strong growth in June, but concerns arise
The UK’s private sector continued to expand in June, albeit inflation pressures are mounting as the country emerges from the pandemic.
According to the latest statistics from IHS Markit/CIPS, the critical index of activity was only slightly lower than May’s record high of 62.9.
IHS Markit also revealed that firms had taken on employees at the fastest rate since the survey began in 1998, with the relaxation of COVID-19 restrictions boosting demand for goods and services.
But while activity in Britain’s manufacturing and services sectors – which account for more than 80% of all business activity – built upon May’s unprecedented growth, analysts have warned that skilled staff shortages and the tapering of support measures could weigh on recovery.
There is also evidence that labour shortages have pushed up wage costs, suggesting that the recent inflation spike could become more of an issue than the Bank of England (BoE) has advised.
If the inflation rate outstrips wage increases, this would also bode poorly for the UK housing market, which is displaying signs of a slowdown.
Although new figures have revealed that almost four in ten properties in England and Wales sold well above their final asking price during early 2021, a lack of supply could dampen the homebuyer frenzy.
House prices have also been branded as “ridiculous” by some homeowners. First-time buyers find it especially difficult to get onto the property ladder amid the ongoing surge in house prices.
According to the latest statistics, UK house prices rose by an average of GBP 2,509 this month, driving house prices to a new record high of GBP 336,073.
