US stimulus talks boost Asia markets
Asian markets are in a positive frame of mind this morning as discussions continue on a new US fiscal stimulus package. Democrat House Leader Nancy Pelosi’s deadline of Tuesday for an agreement that can be enacted before the election has been mostly ignored. Markets, for now, are merely relieved that at least the two sides continue to talk. Nor do they seem concerned that US Senate Republicans seem unlikely to pass a massive stimulus bill, as they seek to out some clear air between themselves and a president well behind in the polls.
US equity futures have risen this morning on the hopes, and on a quiet news weekend, that appears to be dragging Asia higher with it. That continues a trend of cherry-picking the best news, while ignoring what doesn’t fit the narrative. On Friday, US retail sales outperformed, but industrial production and manufacturing did not. Markets put their faith in the US consumer.
This morning in Asia, Japan’s Balance of Trade widened to yen 675 billion for September. That masks the fact that the surplus is flattered by a collapse in imports. Although we note that exports also fell, notably to the European Union. It highlights the uneven nature of the recovery in Asia, which is being led by Japan’s fellow North Asia neighbours, China, South Korea and Taiwan. At the same time, South-East Asia continues to be a very mixed bag. Like Japan, exports are recovering, but domestic consumption remains stifled.
China has just released GDP, Retail Sales and Industrial Production Data. The data is a mixed bag. GDP underperformed slightly, rising 4.90% YoY for Q3, with GDP growth increasing 2.70% QoQ for Q3. Industrial Production outperformed, rising 6.90% YoY for September, versus 5.80% expected, but Retail Sales has taken the starring role. Retail Sales leapt higher by 3.30% YoY for September, much higher than the street’s consensus of 1.80%. China’s GDP growth is the stuff of dreams for the rest of the world. At the same time, industrial production and retail sales continue to confirm China’s rapid economic recovery and its role as the engine room of post-Covid growth. Unsurprisingly, China equities are higher, and we would expect the rest of Asia to take heart from the data as well.
Over the weekend, the PBOC Governor Yi Gang stated that he expected China GDP to expand by around 2.0% for all of 2020. Notably, with regards to the yuan, the governor cited interest rate differentials as a significant driver of the yuan’s rally versus the US dollar – I would also add in spectacular economic data. He said this development should be left to market forces and for the market to set the exchange rate. That should take any concerns about currency wars and devaluations of the table and is green lighting more yuan appreciation. Notably, the PBOC USD/CNY fixing today was the strongest in 18 months.
In Europe, fears of a double-dip recession are increasing as Covid-19 cases increase, and restrictions on movement and business increase. Brexit trade negotiations continue this week apparently, with the House of Lords set to water down the UK government’s internal markets bill, deemed illegal by everybody in the world except the UK government. That has supported sterling, with financial markets pricing in a zero per cent chance of a hard Brexit. A hard Brexit would do neither the European Union nor Britain any favours, wracked as they are by the second wave of a potential Covid-19 recession.
Sterling is likely to be closer to parity to the US dollar then its present 1.3000 welcome to your delusion level if talks fail. Markets may have more than just the US elections to deal with by the end of October. Nor are they pricing inadequately, the risks of a severe double-dip recession in Europe if Covid-19 continues surging. The US is virus-be-damned now and a known known. A double-dip recession in Europe could have knock-on effects across the world, including Asia and is very much an ignored unknown, much like sterling.
I expect the US dollar to outperform ahead of the US elections anyway, as narrowing polls introduce contested election uncertainty in markets thinking, and as investors park risk for havens ahead of the big day. But the euro and the sterling have potentially enormous downside potential when the above discussion points are mixed in. Another outperformer in this scenario could be the Japanese yen, thanks to the penchant for Japan’s institutional investors to move money home when trouble flares overseas. Deflation helps as well.
The week ahead will be driven by US stimulus talks with markets seemingly 100% certain a deal will come before the election. Things may get emotional for the buy-everything FOMO crowd if not, and the US election polls continue to narrow, and the odds of a contested election increase. The same can be said for the UK/Europe Brexit talks, with a no-deal risk wholly ignored.
The second half of the week will be dominated by the last presidential debate on Thursday in the US. That will be President Trump’s last real chance to move the needles on the polls, and I am sure he will take bombastic television to new levels. There is a lot of risk about that financial markets are ignoring as the week starts. I will need some Valium for the presidential debate, and perhaps some barbed wire for the front of my house by the week’s end.
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