It’s A Concession Jim, But Not As We Know it

Manufacturing PMIs beat expectations

Financial markets have had to cope with something most usual over the past 24 hours in 2020, a procession of good news. The efficacy of AstraZeneca’s Covid-19 vaccine gave markets a modest boost yesterday, and European and UK manufacturing flash PMIs outperformed, even as services wilted under Covid-19 lockdowns. President-elect Biden’s intention to appoint former Federal Reserve Chair Janet Yellen as Treasury Secretary was well received. Fiscal stimulus will definitely be on the table in the new administration, even if passing it through the Senate will be a monumental task. The Republicans probably shouldn’t hand-wring over the state of the US government’s finances though; President Trump was running trillion-dollar deficits even before the arrival of Covid-19.

It was the US Manufacturing and Services Flash PMI’s for November that surprised though. Both blew forecasts out of the water, with manufacturing rising to 57.9 and services rising to 57.7. That was a huge surprise, with services showing no damage from the resurgent waves of Covid-19 and subsequent state and city-based movement restrictions. The dollar index bounced around in a near 80-point range, with its almost unchanged finish belying the intra-day volatility.

The PMIs were enough to lift equities into positive territory with the great post-Covid-19 rotation trade in evidence, as the Dow Jones outperformed the Nasdaq. The US economy continues to defy the riders of the apocalypse, an impressive result given the grip the pandemic has on the country. Hindsight may well lay that state of affairs as the feet of the Trump administration, whose laissez-faire growth over graves approach to managing the pandemic, may have laid the foundations for an even more robust recovery in 2021, once vaccines become widely distributed.

Based on the above, Asian markets were primed for a positive start. That momentum has been boosted again though by President Trump instructing the General Services Administration (GSA) to start providing Biden’s team with transition resources. It came, coincidentally, a few hours after Michigan state certified its election results in favour of Mr Biden. Although no concession has been formally announced, denied in fact, it appears that President Trump has conceded the writing is on the wall.

The GSA news will be markets positive for Asia. Markets love certainty and the move by Trump overnight partially removes ambiguity over the presidential succession. A Biden administration is expected to be much less isolationist, with hopes that the US will reengage on global trade and improve relations with China. All positives for Asia as the factory of the world economy. Tokyo markets leapt higher this morning as the news hit the wires, and I expect much the same from the rest of the region today. The cold hard reality is that a President Biden will likely face a hostile Republican-dominated Senate. The legacy of another poor election effort by the Democrats. Getting stuff “done” in this environment will be challenging. But that is a story for 2021, and not for today.

The only blot on the copybook is how much of a scorched earth the outgoing Trump administration will leave. China markets will struggle to buy into the euphoria of the indirect concession today, as the Trump administration prepares to ban 89 Chinese companies associated with the Chinese military. Their nascent commercial jet sector appears to be the primary target. Given that most of the vital systems are American and European, and sitting on thousands of Boeing and Airbuses already in China, it may be shooting American suppliers in the foot as well.

Still, if Western high-tech manufacturing companies weren’t so desperate to sell their souls for rock n’ roll to do business in China, they probably wouldn’t find so many remarkably similar reverse-engineered products coming back at them in the years ahead. My sympathy levels are low.

I suspect the Trump administration will leave a few more international relations and trade “gifts” for Mr Biden to deal with before January 20th.

The data calendar is light to non-existent in Asia today, with some volatility seen in New Zealand after the finance minister announced he intended to ask the Reserve Bank to include the housing market in its policy considerations. That sent the New Zealand dollar soaring as monetary policy outlooks were quickly reassessed. Overall, the day will be dominated by the positive sentiment from movement on the US presidential transition and vaccine progress.

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