“K” is for keep buying everything

Charge the flux capacitors, the world’s financial markets appear to be moving back to a pre-US-election future. In that past future, industries directly tied to the Covid-19 work-from-home mega-trend outperformed (read ‘tech’). A never-ending tsunami of loose monetary policy, notably from the US, inflates asset prices everywhere as investors scramble for any sort of yield on capital that is above zero per cent.

US election vote counting drags on

Regarding the US elections, counting crawls on in several states. However, with the blue wave now a forgotten ripple, no matter which combination of Presidency/Senate the US gets, the pre-election status quo seems inevitable. The only combination I can envisage upsetting the above scenario is a Trump presidency and a Democrat Senate. That seems unlikely in the extreme, but this is 2020, so I’ll not discount it entirely yet.

FOMC hints at further easing

Overnight, the FOMC hinted that more easing is on the way, likely in December. The FOMC left everything unchanged but signalled ongoing concern about the economic impact of the Covid-19 pandemic, now pushing record daily levels in the US. With any hope of meaningful fiscal stimulus disappearing rapidly, it will be left to the Federal Reserve to do the heavy lifting once again. For a picture of what that means for financial markets, go to mid-March and scroll forward to early October.

Financial markets appear to agree, with the US dollar tanking overnight, US yields falling, stocks rallying, emerging markets rallying along with an impressive jump by precious metals after weeks of aimless range trading. As the street realigns to more of the same, the one overriding view I have is that the US dollar will fall in 2021, a lot. With the impasse in Washington DC, the US recovery is almost certain to underperform versus Asia, with the region nicely tucked up on China’s event horizon. The arrival of Covid-19 vaccines in 2021 will amplify that divide.

Tonight’s Non-Farm Payrolls could hurry that process along if they underperform. The street is forecasting a lower gain than last month of around 600,000 jobs. There is a danger of this underperforming though, if temporary census workers drop out of the data tonight. Any dip in equities is likely to be temporary though, as the street will quickly realise that more monetary easing will definitely happen in December. As we advance, unless the US starts getting Covid-19 under control, the data, including the Non-Farms, will begin reflecting that. Please reread the above for my expected outcomes in this case.

Locally, Japan Household Spending recovered on a monthly basis, but is still 10.2% lower YoY. Although Japan’s exports have continued to hold up, the domestic economy remains in an induced coma. Japanese officials will be looking nervously at the Japanese yen today, which made impressive gains versus the greenback overnight and looks set for much more. Expect the watching the currency market closely rhetoric to ramp up as USD/JPY gets closer to 102.00.

Malaysia faces a moment of truth today, with the government having to front in Parliament to table its 2021 budget finally. The budget will be fiscally expansionary within the constraints of its already weak finances. Although exports are powering along, the domestic economy is facing a double-dip hit from the resurgence of Covid-19. There are only so many ringgits the government can tap up Petronas for, either by holding the dividend or “donations” to the Covid-19 fight.

More importantly, the government will face a vote on the budget, which will test whether its razor-thin majority actually exists. Despite the Malaysian King admonishing its politicians and telling them to get on with running the country instead of bickering and manoeuvring, this is Malaysia, and this is Malaysian politics. If the budget vote is defeated, the government’s tenure is in jeopardy, and the ringgit and Malaysian equities may enter a new period of being unloved by investors.

China releases its Balance of Trade on Saturday, with the surplus expected to increase to USD46 billion. Imports are expected to retreat from September’s number and will be the more closely watched component. Imports are forecast to increase YoY by 9.50%, but if that number comes in substantially lower, regional Asian markets may take temporary umbrage on Monday morning.

Otherwise, the world continues to remain glued to the county by county vote tallies of the sewing states in the US election. Although nerve-wracking, the markets appear to have spoken already and are pricing in peak-Trump and the post-March status quo.

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