Pass me some suga

Japan to choose new Prime Minister

Financial markets limped to a neutral close on Friday after a roller-coaster week, notably on equity markets. The thrill of the amusement park rise is unlikely to subside this week though, with a packed calendar for financial markets to sink their teeth into, starting with the appointment of a new Japan Prime Minister today.

Barring any surprises, the victor should emerge as Chief Cabinet Secretary Yoshihide Suga. That decision should not be market moving as we fully expect a steady hand to remain on the tiller of Abenomics. Mr Suga has signalled that no further rises in sales tax are on the horizon, but all else should stay the same. Of more interest will be if Mr Suga signals that a new election will be held to mandate his new government. Finance Minister Aso signalled as such in recent days, although Covid-19 may affect the timing.

The central bank calendar is packed with the Bank of Japan, Federal Reserve and Bank of England all due to announce their latest rate decisions. Regionally, both Taiwan and Bank Indonesia release rate decisions. Of that esteemed grouping, the Bank of England and Bank Indonesia hold the most interest. We can expect rates to remain unchanged amongst the others, with the usual lower for longer, do whatever it takes rhetoric from them.

The Bank of England (BoE) could well signal that it intends to increase quantitative easing and may put the prospect of negative rates on the table. Readers will know that I hate negative interest rates as a policy, but the BoE may have no choice but to do both given the Brexit ructions and impending increase in unemployment on the near horizon. The odds of a hard Brexit have risen exponentially last week, as trade negotiations with the European Union have stalled. The UK government’s tabling of a bill that unilaterally changes the terms of the Brexit agreement has drawn domestic and international condemnation. The actions of the government and a probable dovish BoE will be most acutely felt in the currency markets, where the British pound is likely to remain under some severe stress.

Bank Indonesia (BI) has an altogether different set of problems that look very much like a Hobson’s choice. With Jakarta -where the author is sitting- restarting a strict Covid-19 lockdown today, the economy is almost sure to come under more downward pressure. That was evidenced by Indonesia equities being cratered after the lockdown was announced last week. Indonesia, South East Asia’s largest economy and population centre, is screaming for more rate cuts, and the central bank ostensibly has plenty of room to deliver. However, the Indonesian rupiah fell strongly last week despite plenty of BI, having been punished by investors for directly monetising some government bond issuance earlier in the year. BI’s line in the sand appears to be at a USD/IDR rate of 15,000.00, with the Rupiah closing at 14,900.00 on Friday. BI may have no choice but to reassure international investors by holding rates firm at 4.0%, even as the domestic economy sinks deeper into recession following Jakarta’s decision.

Another Asian country facing some tough choices is India, which sees the release of CPI this afternoon. The CPI print is likely to be, around 7.10% YoY, well above the Reserve Bank of India’s target. With Covid-19 rampaging across the country, India finds itself in the worst of all worlds, falling growth and rising prices. That stagflationary dark corner of economics is a dangerous one, and monetary policy cannot solve both issues simultaneously. Again, the immediate effects are likely to be felt in the currency market, and I struggle to see the Indian rupee maintaining its recent gains versus the US dollar. That would be bad news for the inflation equation, unless oil prices continue to fall on international markets. In a Covid-19 world, increasing productivity (one stagflationary solution), will be nigh on impossible. India, like Indonesia, will likely have to just wear the pain, and hope that vaccines arrive en masse in late Q4 2020; a strategy more than a few countries appear to be increasingly adopting.

In contrast, China will release Industrial Production and Retail Sales tomorrow. Industrial Production is expected to rise to 5.20% Y0Y. Retail Sales for August are expected to grow from -1.10% to 0.0%, confirming a recovery trajectory that belies the headline number. On Friday, China’s aggregate financing data for August blew expectations out of the water, rising to 3.6 trillion yuan. Even if the PBOC is keeping a firm hand on interest rates, stimulus is in full cry in China. That will be good news for regional markets exporting to China, but also for China domestic markets, where both the export and domestic sectors appear to be recovering nicely. That partially explains the firmness of the CNY of late versus the US dollar, and I expect that to be the direct reflection of the China recovery, with Chinese equities marching to their own beat.

China announced stricter capital requirements for non-bank financial companies over the weekend. Notably, this encompasses entities such as Ant Financial and comes after the government capped lending rates by the sector two weeks ago. Ant Financial’s eagerly anticipated IPO should not be affected, though, with the government’s actions having been anticipated as a known known.

Things will get somewhat murkier for Byte Dance and its TikTok app tomorrow, which is the deadline for a sale of its US operations from the US government or be closed there. Now also needing Chinese government approval for a deal to proceed, Byte Dance has said it would not sell the core source code as part of a US divestiture. The pendulum appears to be swinging towards Byte Dance walking away from a US sale unless some sort of US extension is allowed. That may weigh on the Chinese tech sector today, emphasising as it does, the challenges China tech will have emerging from their enchanted garden behind the great firewall of China.

Japan’s SoftBank is also in the news, announcing a USD40 billion sale of its Arm Holdings chip designer to Nvidia for USD40 billion. The Financial Times is also reporting that SoftBank has revived a plan to go private. The combination is likely to lift SoftBank’s share price in Tokyo today, having been under pressure following revelations about giant positions in US tech-stock call options.

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