Presidential flip flop flops

The Democrats appear to have called President Trump’s bluff on his standard negotiating tactic of abruptly ending talks to gain concessions from the other side. The House Democrats, while open to some direct bailouts of the airlines, have held their ground and tied more stimulus directly to a larger package, rather than a cherry-picking vote-winning approach favoured by the President. President Trump himself appeared to backtrack on a stimulus package as well, if it is “skinny”. Nevertheless, the fact that Steven Mnuchin and Nancy Pelosi were talking was enough to send US equities modestly higher overnight.

Today is likely to be a cautious one in Asia though, with market swings this week dominated by the presidential Twitter account. When the world’s financial markets are at the mercy of the randomness emanating from the White House, it is hardly surprising that investors elsewhere would prefer to wait on the side-lines. Unfortunately, things are unlikely to settle down over the next few weeks, with presidential tweets likely to increase or decrease inversely with his performance in the polls.

China returns from its 8-day holiday today with indications that retail spending rose by over 6.0% during that period, and that domestic airline capacity ran at 91%. The Caixin Services PMI for September has just been released, rising for the 5th straight month to 54.8, although the Composite PMI fell slightly to 54.5. Both numbers are well in expansionary territory though, and taken with the above in totality, reinforce that China is recovering strongly from the pandemic slowdown, boosted by exports and the critical mass of its domestic market.

That should be supportive of Asian equity markets, noise from the White House aside, who will have been casting nervous eyes at their other key markets in Europe and the United States with concern. It should also ensure that the region’s currencies, with a high beta to China, also outperform developed market currencies, notably in Europe.

This morning also saw data from Japan and the Philippines, both of which disappointed. Japan Household Spending for August MoM rose 1.70%, but both it and Average Cash Earnings YoY are well below a year ago. Notably, household spending, which remains nearly 7.0% lower than the same time a year ago. The Philippines’ Balance of Trade for August posted a deficit of $-2.075 billion, notable for a collapse in imports and exports versus a year ago of around 20.0%. It highlights the uneven nature of the Asian recovery, with China, South Korea and Taiwan outperforming, while much of South East Asia and Japan continue to struggle.

The data calendar remains light or second-tier across Europe and the US today with UK Industrial Production and Manufacturing Production of passing interest. With a week to go until the United Kingdom’s self-imposed Brexit talks deadline, that issue is likely to dominate, however. Europe itself is also struggling with the challenges of enacting its stimulus package as it struggles to bring authoritarian governments in Poland and Hungary into line. All the above issues will cap sentiment today in Europe and the UK but are likely to become of more importance next week. Far more concerning is the explosion of Covid-19 cases across the Eurozone and UK, with the ensuing threat of escalating movement restrictions. Markets have not priced in this risk sufficiently, in my opinion, and any weekend developments could see the euro and sterling come under pressure at the start of next week.

In the bigger picture, though, the main event remains an increasingly random US president in the White House and his social media account. It is almost inevitable that spurts of volatility will be spurred by him today, with the White House the source of plenty of weekend headline risk as well. Monday’s market opening could be a frisky one; just don’t ask me which way. Only the fly “bugging” Mike Pence yesterday can probably answer that.

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