Markets love it when a plan comes together

Even the A-Team’s “Hannibal” Smith would be impressed at how well the financial markets buy everything, sell the US dollar plan is coming together as the year ends. US 10-year yields eased slightly overnight, equities are moving higher, along with precious metals, commodities and energy, and currency markets spent the overnight session clubbing the greenback harder than a harp seal harvest.

Although the US dollar has been grinding lower throughout the week, it is interesting that currency markets have waited until the year’s penultimate trading session to press the accelerator. Part of that is probably down to the UK approval of the Astra Zeneca/Oxford University Covid-19 for immediate use. The Astra Zeneca vaccine is a potential game-changing accelerator in the Covid-19 battle, being producible rapidly in massive amounts, and storable at room temperatures, instead of environments that mimic the South Pole in the middle of winter.

Although not as effective at first sight as the supremely engineered mRNA vaccines from Pfizer and Moderna, it doesn’t have to be. Russia won World War 2 in part through the use of the T-34 tank. It was cheap and mass-produced, but it wasn’t a bad tank at all. The Astra Zeneca vaccine could well be the T-34 of the Covid-19 war, or if you are British and a bit patriotic about it, the Hurricane to the mRNA Spitfire.

I am firmly in the corner of a lower US dollar and higher asset prices everywhere in 2021, propelled by the US twin deficit and central banks keeping interest rates at lower levels for longer. However, currency markets popping the champagne early has raised two points of concern. Firstly, the wizened experience of 30+ years in the show with everything but Yul Brunner, suggests that financial markets throw the kitchen sink at the group-think theme of the year in the first weeks of January.

Unfortunately, the first directional move of the year is usually the wrong one, resulting in a very painful correction, before regular service resumes after convalescence in profit & loss hospital. Beware of running with the herd towards the watering hole January. That cool water often has a salt-water crocodile in it.

Secondly, next Tuesday sees the double senate runoff in the US state of Georgia. Thankfully, polling is light thus far as the statistical boffins continue to lick their wounds from another drubbing at the US elections in November. Those few that have been conducted suggest that it is too close to call. The election is important because if the Democrats win both seats, they will assume control of the House, the Senate, and the presidency. Conversely, if the Republicans win only one of the two seats, the status quo remains.

Markets have been pricing in the second scenario as an absolute certainty, with another two years at least of Mitch McConnell tempering the perceived fiscal largesse of a Biden presidency. That is evidenced by his “no realistic path to quickly pass the Senate” comments last night over the presidential wishes for USD2,000 stimulus cheques. Should the Democrats win both seats on Tuesday though, a rather nasty shock could hit the markets. With the world long everything and short the US dollar to the eyeballs, a Democrat win would raise the spectre of higher taxes and a strong move to the left in America. That could provoke a sharp correction in what is perceived as a sure-thing, one-way trade.

In the bigger scheme of things, it won’t materially change my 2021 outlook. Vaccines will inspire a global recovery; central banks will leave rates at zero even if inflation rises to fund exploding government deficits everywhere. And the search for yield in a zero per cent world flooded with unlimited free money for the world’s central banks means the K-shaped recovery, asset price inflation scenario seems a certainty. January though could keep investors honest. Sometimes plans only last as long as the first engagement.

None of that will bother Asia today, with China’s official Manufacturing and Non-Manufacturing PMI’s retreating ever so slightly to 51.9 and 55.7 respectively. China’s international major export markets’ woes (Covid-19), likely explains the slight easing in the manufacturing number, with Non-Manufacturing exports also easing slightly. Both numbers remain in solid expansion territory, signalling that China will continue leading the world out of the 2020 recession into 2021.

With Japan and South Korea closed, and Australia, New Zealand and Singapore markets on half-days, activity in Asia is likely to fall quite rapidly this afternoon. The reduced liquidity today will leave financial markets vulnerable to headline shocks, so making your way to the side-lines is a wise strategy.

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