Four Seasons In One Day

The weekend news was dominated by the US election being called unofficially for Joe Biden. US networks calling the election wasn’t enough to get President Trump off the golf course but did result in a hastily convened press conference featuring President Trump’s lawyer, Rudy Giuliani in a gritty Philadelphia industrial suburb. Mr Giuliani announced the Republican’s intent to launch legal challenges to several state results where the President had been narrowly defeated. With the President not in residence, the White House became a less crowded house anyway as more White House officials came down with Covid-19.

Although of no surprise, the location overshadowed the announcement, being located in front of Four Season’s Total Landscaping (not the hotel), Fantasy Island and across the road from a crematorium. Cynics might regard it as a metaphor for the last four years; I regard it as sound politics with poor execution, metaphorically. The President is well within his rights to challenge the results, and some recounts are inevitable. But with Mr Biden looking likely to extend his electoral college votes as the last states complete counts, it is a leap of faith that the Republicans will overturn results in multiple US states by the margins required.

Financial markets higher on Biden victory

Financial markets have ignored the stalemate in the US Senate, which will be decided on a rerun in Georgia in January. The street has looked and loaded a Biden presidency with the asset price rally of last week continuing apace in Asia this morning. Mr Biden is perceived in Asia as being likely to re-engage in international trade, a positive for Asia. There may also be some dialling down of the geopolitical tensions in the region, although I suspect that China and American butting heads are now entrenched as the new normal.

The US Non-Farm Payrolls and Unemployment Rate released on Friday both outperformed. Payrolls rose by 638,000 jobs, although the number hid a slide in Federal and State government’s hiring, with census workers laid off and state governments shrinking payrolls to balance budgets. Unemployment fell impressively to 6.90%, but again, the headline number may flatter to deceive. The unemployment rate is derived from a 60,000-person poll, which after the US election performance by polling companies, should fill no one with confidence. With Covid-19 rampaging in the US, further gains by either dataset as we advance may be challenging.

The critical takeaway for the data though, are the comments of the US Republican and newly re-elected Senate Leader, Mitch McConnell. Over the weekend, Senator McConnell used both economic releases to pour cold water on the need for giant stimulus packages. That highlights the challenges President-elect Biden will have getting a meaningful fiscal package over the line, and indeed just about anything ahead of mid-terms in 2022. Only a dramatic double-dip in 2021 might see the Republicans waver. Despite the relief of many at Mr Biden’s provisional win, the Democrat’s overall performance was poor, and the blue wave becoming a blue ripple through the presidency, Senate and House elections will yet come back to haunt them.

That means, of course, that the Federal Reserve will need to continue doing the heavy lifting via monetary policy. More easing is almost certainly on the way at December’s FOMC meeting. Looser monetary policy equals higher asset prices in a zero per cent interest rate world. Asian markets are rallying strongly today, regional equities, currencies, and commodities such as iron ore, all making impressive gains. However, it is not just a Biden afterglow that is driving the move, the underlying drivers of the rally in everything since mid-March are now firmly back in place.

China released its October Balance of Trade on Saturday, lost in the US elections noise. Exports rose impressively by 11.4%, propelled by handphone shipments. Imports disappointed though, rising only 4.7% YoY, well below the 9.5% expected. The long holiday in October may have been distorted the headline number. With US and European consumption set to fall due to Covid-19, China will get a pass this time, but may not be so lucky if the November data disappoints. The same goes for the US and Europe as well, with Covid-19 set to infect the data once again going forward.

A slowdown by China, the US and Europe will not make for a very merry Christmas for the world, but potential falls in asset prices will be corrective and not structural. The monetary policy spigots of the world remain open and are likely to be opened further. That will mollify the adverse effects of the real-world intruding on the narrative of the financial markets Truman Show.

Elsewhere in the region, signs of recovery continue. Japan’s Reuters Tankan survey remained negative at -13, versus -26 previously. In Japan’s world, anything less negative than the negative of the month before is a positive. Australian Building Permits leapt by 15.4% in September as the post-Covid-19 peace dividend gets locked in inside its borders. Malaysia’s 2021 budget was well received on Friday, and the country appears to have a government still.

The Biden victory rally will dominate this week but with two unencumbered months in the White House, don’t rule out some market-moving surprises from President Trump. New Zealand may provide some fireworks as well. Covid-19 has escaped from the government isolation facilities into the community again. The RBNZ rate announcement this week will likely see them joining Australia at 0.10% but telegraphing a more into negative rates in early 2021, along with other easing measures in the form of cheap loans to banks. All potentially negative for the currency, and even as a homeowner in New Zealand, its housing market is making me nervous. If the RBNZ is going to give the banks cheap money, it should come with the caveat that it is lent to business, and not as mortgages.

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