I think it’s safe to say, last week more than lived up to expectations. We may never see a US election like it again. What is remarkable is how relaxed traders have been throughout. And to think, this was only one of a number of major risk events between now and year-end. It’s going to be a fascinating couple of months in the markets.
US
The Federal Reserve unsurprisingly kept its powder dry and announced no more easing but it did raise concerns about the economic outlook and the lack of fiscal stimulus. Many expect the central bank to announce further easing measures in December, once the election is resolved and with new economic projections to guide them. They’ll also have a better idea of how bad the Covid situation has got by then and whether any needed stimulus is forthcoming.
The jobs report was strong with 638,000 jobs added and unemployment falling to 6.9% although this would have been 0.3% higher if workers classified correctly. Next week is mainly made up of tier two and three data, with the election hangover likely continuing to dominate the headlines.
EU
It was a low key week for the EU and next week will be no different, with a number of tier three economic data and very little else. The ECB has pushed back any stimulus to December so it’s simply a case of waiting and watching.
Brexit
COVID aside, this remains the number one issue for the UK and EU. Talks have intensified and it’s been pretty quiet in public which is promising. Both sides clearly agreed to stop fighting this out in public and focus on finding a compromise in private. It does seem we’re edging closer to a deal, it’s just a case of when. The next week could be crucial. A collapse at this late stage would be a terrible failure from all concerned and I don’t think it’s likely now.
UK
With the country in lockdown for the next month, the economy is going to struggle. The extension of the furlough scheme until the end of March will help but with the announcement coming so late in the day, it will be too late for some.
Still, the BoE did revise down the end of year unemployment forecast this week to 6.25% from 7.5% in August, although it also revised down growth for this year (-11% from -9.5% in August) and next (7.25% from 9%), with 2022 expected to be better (6.25% from 3.5%). It also increased its asset purchase program by £150 billion, 50% more than the market anticipated, and suggested more could come if needed, possibly reducing the prospect of negative rates.
China
Ant Financial IPO forgotten within days of cancellation.
PPI Wednesday expected to fall 2.0% YoY, likely due to holiday distortions. No market effect.
Sentiment in China markets driven by the evolution of the US election situation.
Hong Kong
USD/HKD remains at the bottom of its trading band with heavy buying from the HKMA. With FOMC in play in December, yield carry will keep HKD there despite unwinding of Ant Financial IPO funds by offshore investors.
GDP Friday, wide range but no direct market effect..
India
India CPI, Balance of Trade and Industrial Production on Thursday. CPI will show inflation remains high at over 7.0%. BoT will show exports falling but imports collapsing by 20%. Industrial Production remains contractionary at -3%.
In other words India is in the grip of stagflation as it wrestles with the Covid-19 pandemic/recession. INR gained little benefit from Dollar weakness and will remain a regional underperformer. Credit quality concerns and banks persist.
New Zealand
The RBNZ meeting on Wednesday poses a serious threat to the NZ Dollar rally. RBNZ expected to cut from 0.25% to 0.10%. There is a possibility that RBNZ will go NEGATIVE rates though. RBNZ Governor Orr is an uber-dove and has publicly stated he is not afraid to use negative rates.
Very negative NZD if RBNZ goes negative, exercise caution tracking Kiwi higher with AUD until RBNZ is done.
Australia
NAB and Westpac Consumer Confidences expected to ease slightly as Covid-19 reopening peace dividend fades.
AUD/USD one of world’s best FX performers as the FOMC easing, China commodity story reasserts itself as per before the US election.
China appears to be waging a silent trade war with Australia. Effectively blocking all key exports except Iron Ore and Gas, but verbally telling importers to source elsewhere. If officially confirmed, strong negative for Australia equities and AUD, as Australia has let itself become a one trick pony. Surprisingly ignored over the past week, but will remain a major downside risk.
Japan
Reuters Tanken survey, Machinery Orders and PPI will show that Japan’s domestic outlook remains in recession and that Japan is grappling with deflation again. GDP Friday will show an improvement to -3.50% YoY but still anchored in negative territory.
Yen has rallied impressively over the last 48 hours, with USD/JPY breaking long-term support at 104.00, targeting 102.00 and 101.00. That will exacerbate deflationary pressures and will have the Government/MoF and Boj nervous. Expect a ramp-up in currency comments as USD/JPY approaches 102.00. No intervention though unless USD/JPY breaks 100.00. If the rest of Asia FX also rallies strongly, that likelihood lessens.