The filling in the sandwich

Financial markets marked by range trading

Financial markets continue to range nervously, sandwiched between Covid-19 vaccine-driven hopes for the future, and the reality of the here and now. That sees Covid-19 cases rampaging, forcing ever more stringent movement restrictions in the developed world. It is a tough place to be, with markets long addicted to a technology-driven instant gratification information overload.

Based on 2020 thus far though, the financial markets ability to “look ahead” and divorce itself from the reality of our everyday life, will probably win the day. We will just need one more kicker to restart the buy everything rally, which is being driven by the search for yield in a zero-per cent world. That could come in the form of another pharma-company announcing positive vaccine results, or perhaps by President Trump throwing in the towel. My money is on the former, as I have nagging fears the Republican strategy is to hang on as long as possible, leaving a scorched earth for the incoming administration, with one eye on the 2022 mid-terms. “It’s forward planning Jim, but not as we know it.”

US Initial Jobless Claims could also spur the FOMO gnomes back if the number comes in well below 700,000 tonight. The closing of New York City schools overnight, as Covid-19 restrictions increase, seems to have been the catalyst for more profit-taking in the markets amid the despairing wails of NYC parents.

Although various Federal Reserve governors and prominent CEOs are calling for more US fiscal stimulus, the vaccine announcements by Pfizer and Moderna have lessened those hopes. A USD500 billion at USD2.2 trillion spread is wider than Bitcoin on a busy day. If the Initial Jobless Claims strongly outperform tonight, the propensity of Republicans to raise their bid will fade further rover the event horizon. The weight will fall, as ever since the Global Financial Crisis, on the shoulders of the Fed. December will definitely see more easing in some form or shape, and the ECB will join them. Good for asset prices, bad for economic inequality.

Today both the Philippines and Indonesia will release their latest rate decisions, and I expect both to follow Thailand yesterday and hold rates unchanged. With the surge in inflation in the Philippines, real interest rates are already negative, although, of the two, the BSP is most likely to cut, with the peso at four-year highs. They will probably keep their powder dry though for now and let the spike in food prices work its way through the system. Bank Indonesia will have one eye on the rupiah in its decision, with the fall of USD/IDR from 14,900 to 14,100 in recent days a massive sigh of relief. Nevertheless, the currency isn’t out of the woods, much like the country’s Covid-19 strategy. I do expect indirect measures such as the easing of bank liquidity ratios, or a cheap funding programme to appear.

Both South Korea and Thailand have started making noises about currency appreciation in recent days. Unfortunately, both have already nearly exhausted their ability to cut rates. In other parts of Asia though, with most regional currencies marching higher with the yuan in military precision, regional Asian central banks still have room to move. That is the blessing that currency appreciation confers, and with the dollar expected to fall in 2021, will increase more. Given the outperformance of Asia, and with 2021 uncertain still, most will keep the ammunition locked up out of the rain.

Australia produced a gargantuan employment number today, befitting its moniker as the Lucky Country, despite China’s best efforts to disagree. Employment rose by a massive 179,000 jobs, 97,000 of them full time, blowing the market estimates of a fall by 30,000 into oblivion. The headline unemployment rate remained steady at 7.0% as more females surveyed re-entered the workforce looking for part-time work. Although the survey was tweaked last month, the headline numbers came during the Victoria State lockdown, making them even more impressive. It will be interesting to see if they can maintain this momentum as we advance. Strangely, neither stock markets nor the currency reacted, highlighting that the drivers of world markets remain centred in the US, Europe and China. The number should provide indirect support to both though.

For the next few days for financial markets in general, however, “patience grasshopper” is the order of the day.

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