A most hollow victory

As things stand now, former Vice-President Joe Biden will be the next US president by the slimmest of margins. The victory is a hollow one though, as the Democrats look set to fail in their bid to gain control of the US Senate. There will be court cases and recounts possibly, but it would take every last uncounted senate race vote to be blue, and a win in the Georgia run-off in January to change that outcome.

Probably the only group with more egg on their face then the Democrats – who have once again run a campaign with a candidate that couldn’t cross the fissures in American society, and underestimated President Trump’s junkyard dog political stamina – is the polling industry, which is now in an existential crisis. The blue wave was barely a blue ripple on the day.

What the election revealed was that America is as divided as ever. The differences were stark in the swing states, with urban centres blue, and rural counties a sea of red. In Florida, the Democrats could not even rally the Latino vote. From an international perspective, a President Biden will be a welcome change to many. He will struggle to repair international relations and America’s reliability as a partner. The international community will see an America as divided as ever, with concerns we will be back to square one in four years’ time, with Biden likely a one-term president. The election of Biden will not now, even represent the start of peak-chest thumping male national leader, a disturbing trend internationally that has served the world so poorly.

For financial markets, though, the result is a boon. Gone will be a multi-trillion-dollar fiscal stimulus. In will come more monetary policy stimulus as the Federal Reserve takes the burden on its shoulders. Even if President Trump were to make a miraculous comeback, that status quo would be unchanged. It is, therefore, little surprise that US equity markets powered higher and the US dollar quickly unwound all of its gains yesterday.

Financial markets are virtually back to the future, with central bank monetary policy driving asset prices ever higher funded by unlimited zero-per-cent central bank money globally, and by the Federal Reserve in particular. Slip in the arrival of Covid-19 vaccines in 2021 and subsequent global recovery (hopefully), and the stage is set for the market disconnect from the realities of real-life to widen. Last night’s election was a victory for higher equity prices, higher commodity prices, higher house prices, a rally in emerging markets and a much lower US dollar. The US was running a trillion-dollar deficit before Covid-19. Under a new president, that will not change, and the debasement of the greenback seems almost inevitable through 2021.

Of course, economic inequality and the ability to overcome that gap will increase, ironically impacting many Republican voters the most. It is a strange day when I found myself agreeing with similar statements made by China in official media. The world is undoubtedly storing up problems for another day in this respect. It will matter not though to the FOMO gnomes, however, with the buy everything global recovery trade back in full swing overnight. If you are not long equities, property, precious metals and emerging markets, you probably should be. If you are pandemically unemployed or can’t afford it, sorry, you’ll just have to wait for the revolution.

There is life after the US elections thankfully, and it must go on. And so, it shall, with a packed calendar of back-to-real-life event risk this week. Notably, we have an FOMC rate decision this evening in the US. We expect no changes from the FOMC tonight, but December will be a live meeting, especially if activity slows due to Covid-19, and with meaningful fiscal stimulus probably DOA now. The statement will, of course, be uber dovish and bearish for the dollar.

Those signs may already be upon us with ISM Non-Manufacturing New Orders, Employment and Business Activity all undershooting overnight. ADP Employment disappointed on Tuesday rising only 365,000. We expect tomorrow’s Non-Farm Payrolls to fall to 600,000 jobs and possibly lower, with tonight’s Initial Jobless Claims falling only slightly to 730,000.

Sterling suffered overnight, despite the reversal by the US dollar elsewhere. No Brexit talks breakthroughs weighed on the pound ahead of the Bank of England rate decision today. The BoE should leave rates unchanged at 0.10% but will almost certainly increase its quantitative easing total by at least GBP 100 billion. Markets will be watching for comments on the possibility of negative interest rates in the future, which will likely send sterling lower again.

In Asia today, South Korea’s Current Account surplus surprised to the upside, climbing to USD 10.20 billion, even more, impressive considering the appreciation in the won. Australia’s Balance of Trade leapt to AUD 5.63 billion, over twice last month’s total. Both South Korea and Australia are benefiting from being adjacent to China’s event horizon. A story that continues to permeate Asia as a whole, notably North Asia.

Australia faces headwinds though, with China allegedly blocking entire swaths of Australian exports except for iron ore and gas from now on. Australia’s export machine is a one-trick pony driven by China, and I am surprised financial markets have entirely ignored the negative connotations of this turn of events. One of Mr Biden’s first jobs should be to unlock appoints to the WTO appellate body to help their mates down under.

Singapore releases Retail Sales at 1300 SGT, with an expected modest recovery of 2.50%. The domestic economy remains mired in a recession, though, despite manufacturing and exports recovering. Singapore will not fire on all cylinders until the recovery takes hold regionally and international borders reopen.

Malaysia tables its 2021 budget tomorrow in parliament. The Malaysian ringgit and KLFCI have underperformed this week as the government faces a potential test of its wafer-thin majority. Having been told by the Malaysian king to stop squabbling and run the country, the government’s budget will add incrementally to the fiscal stimulus already in place this year. However, the real story is whether they can muster enough votes to pass the budget. Malaysian p0olitics being what it is, that is no certainty, and we expect Malaysia to underperform until that vote is passed, or not.

Indonesia releases Q3 GDP at 1200 SGT, with growth QoQ expected to rebound by 5.35%, offsetting the fall in Q2 of 4.20%. The GDP number should relieve the downward pressure on the rupiah, one of the region’s worst-performing currencies this year, although it has found friends in recent days. Covid-19 cases have stabilised in Indonesia between 3,500/4,000 per day over the past month. An impressive effort for a developing country of 300 million people.

Being based in Jakarta, I have certainly noticed the pickup in domestic activity. Lockdowns have passed, Covid-19 has stabilised allegedly, and if I wanted, I could go to the pub on Saturday and watch New Zealand continue Australia’s misery in international rugby.

Indonesia has been unloved all year, especially after the central bank directly monetised a government bond issue. Having just passed a vast labour market reform law, along with adjustments to foreign investment in the same omnibus bill, Indonesia has the ability to surprise to the upside in the months ahead. A long Indonesia/Singapore versus short Malaysia basket trade wouldn’t be the dumbest thing I’ve heard in 2020.

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