A day of consolidation beckons

Financial markets have a hurry up and wait look about them at the moment. There are lots of balls in the air now, but none of them has landed. A new bi-partisan USD908 billion US fiscal stimulus proposal was released, but nobody knows if it will get past the Senate Republicans. China. Brexit is well, Brexit. Enough said. Pfizer-BioNTech’s Covid-19 vaccine started distribution in the United States, but New York is heading for a hard lockdown, and the virus’ rampage across the US continues unabated. London is also heading for stronger virus curbs, with Germany, the Netherlands and Ireland facing the same. In Asia, Japan, South Korea and Japan face the same creeping situation, although to a much lesser extent.

Big tech is also suffering a case of the wobbles. China has fined Alibaba and a unit of Tencent for antitrust violations. Meanwhile, the European Union and the United Kingdom appear closer to introducing laws to hold technology companies responsible for false news, privacy and monopolist behaviours. Those are ongoing against Alphabet and Facebook in the US. Even if the suits by the US FTC fail, one thing the Democrats and Republicans agree on is the power of big tech. Legislation could well follow in 2021. Big tech globally may be printing money in the working from home era of 2020, but I have a nagging feeling they will face their Standard Oil moment in 2021 worldwide.

China recovery continues

China’s Industrial Production and Fixed Asset Investment YoY for November rose 7.0% and 2.60%, right on expectations. Retail Sales YoY for November coming in slightly lower at 5.0%. All of the data improved over October, reaffirming China’s remarkable recovery as it leads the world out of the Covid-19 recession. The data has had no noticeable effect on China markets though, with financial markets more concerned about the recent waves of corporate defaults and a tight funding market. The PBOC injected another CNY 950 billion of liquidity via the 1-year MLF’s today. The froth has come off the China fixed income market in recent weeks as corporate credit concerns rise. I expect that impact to be transitory though in 2021, with China’s yield advantage being irresistible to international investors in a zero per cent world.

The Reserve Bank of Australia’s latest meeting minutes were published today. Rates are expected to stay lower for longer, for 2-3 years in fact. Inflation will remain subdued, and although vaccine arrival lifts the outlook for 2021, the RBA stands by to do whatever it takes in a very Federal Reserve or ECB fashion. Australian markets are subdued though as China iron ore importers called for a pricing inquiry, adding to Australia’s export woes vis-a-vis China. I can save China’s iron ore importers some time though. When you have to buy all your ore from just Brazil and Australia, prices go up; the end.

Nevertheless, it adds more clouds to Australia’s trade outlook in 2021. China won’t escape unscathed either in the longer run. By effectively tearing up their free trade agreement with Australia because Australia said things China didn’t like, it will add even more doubts about what a piece of paper signed by China is actually worth.

The US FOMC starts its two-day policy meeting today with its rate decision coming out early on Thursday morning Asian time. That will be followed on Thursday by rate decisions from Taiwan, the Philippines and Indonesia. All, including the FOMC, will leave rates unchanged. The picture will be cloudier for the FOMC, which may announce it will increase the duration of its bond-buying to cap longer-term rates, which have been creeping higher. If Congress has passed a fiscal stimulus package by now, I would have said this was 100% the likely FOMC outcome. Alas, it remains mired on Capitol Hill, so the Fed will likely indicate it “intends” to consider doing so in the new year seriously. Either way, it should be positive for equities and precious metals, with US real interest rates likely to be negative for longer.

With so much up in the air, momentum has waned for the buy everything trade. That has seen the one-way trades in equity and currency markets pause for breath. But in a zero-per cent world, that situation is likely to be temporary. Things should be more transparent by the week’s end; in the meantime, some patience and last-minute Christmas shopping are the best courses.

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