Presidential homecoming boosts sentiment

US President Donald Trump returned to the White House yesterday after a few days in the hospital for treatment for Covid-19. It marked a rather dramatic turnaround for the president, and the rapid homecoming for Mr Trump saw the buy-everything trade return with a vengeance. Mr Trump’s recovery seems somewhat remarkable. I will avoid being an armchair virologist, leaving that to uncounted billions on social media. I will await the completion of his 10-day quarantine period while wishing the president a speedy recovery.

I will note that if Mr Trump’s cocktail of drugs and a mild case of Covid-19 plays out, it could change the face of the US election. President Trump and his coterie have had a “flexible” interpretation of the Covid-19 pandemic thus far. A mild case and a quick recovery would vindicate his position on the disease to many of his supporters, and perhaps more than a few undecided or wavering voters. The president’s illness could be the event that decisively closes the polling gap with Mr Biden. Watch this space.

Also on US politics, another significant event occurs tomorrow evening US time. The vice-presidential debate between US Vice-President Mike Pence and Senator Kamala Harris. Usually a strictly B-team affair in presidential elections, tomorrow’s debate will be squarely focused on Ms Harris as a window to America’s future. With the Democrats leading in the polls and Joe Biden expected to be a one-term president, America could well view the debate as an adversarial job interview for a future female and minority President. A poor performance by Ms Harris could again be another needle mover for the Republicans in the polls. I will watch with interest, praying for debate this time and not Washington DC Shores.

Markets rallied impressively overnight, with the presidential homecoming. Expectations have also lifted markedly that Republicans and Democrats will agree on a new fiscal stimulus package before the US elections. The market spread between the two sides remains $1.5 trillion at $2.2 trillion, an eye-watering one to cross for sure. Expectations are undeniably rising that compromise will be reached. With the FOMO gnomes of Wall Street piling into everything, I dread to see the correction if they don’t, though.

Markets received another boost in the form of the US ISM Non-Manufacturing PMI for September, which rose to 57.8, another impressive gain. All of the components also showed robust increases into further expansionary territory, notably new orders and employment. It is further evidence that the US economy has staged a mighty comeback from the depths of despair in Q2. However, the Non-Farm Payrolls data last Friday suggests the pace of recovery is slowing. Further impressive gains will be much harder to come by in Q4 with fiscal lifting from the government.

The buy-everything trade followed its usual playbook overnight. Equities surged, the US dollar fell with pro-cyclical Asian currencies outperforming, and precious metals rose, probably because they weren’t nailed to the floor. Energy was the undoubtable star though, with oil prices surging by nearly 6.0%. Apart from recovery/stimulus hopes, oil has Norwegian oil strikes and Hurricane Delta in the Caribbean to provide strong tailwinds. US treasury yields also rose, notably in the long end of the curve. One look at the US government deficit would explain part of it, as do the expectations of higher borrowing under a Biden presidency. The US yield curve is likely to be a story for 2021 though, and not 2020, although a steeper curve should be good for bank profitability, it won’t make the Federal Reserve happy, nor US dollar bears.

In Asia today, South Korean inflation jumped to 1.0% YoY for September. The spike though is mostly due to a weather-related surge in food prices. It will, however, vindicate the Bank of Korea’s hold-fast rate stance, which should, in turn, be another tick in the box for won strength.

Australia’s trade balance shrank to an AUD 2.6 billion surplus in August, led by a fall in exports. In the 2020 environment, though, a number that is over one month old may as well be 100 years old. Markets have ignored it. Markets’ attention will be focused on the latest RBA rate decision at 1130 SGT, and the Australian budget, due around 1600 SGT this afternoon.

We expect the RBA to hold steady at 0.25%, given the strength of Australia’s economic rebound. The RBA is likely to be neutral at these levels whilst highlighting downside risks and the ability to cut rates again if it becomes necessary. The federal budget is expected to contain a treasure trove of goodies to stimulate the economy and protect jobs to weather the Covid-19 slowdown. Both should be currency supportive.

Internationally, German Factory Orders and the US Balance of Trade take centre stage. Additionally, UK/Europe post-Brexit talks continue with their 15th October deadline approaching rapidly. One gets the sense that a breakthrough is coming, which has been sterling supportive. Financial markets have largely ignored Europe’s (including the UK), evolving imposition of Covid-19 restrictions. It shouldn’t be, but it is likely to be a story for next week. In all likelihood, all the above will be subsumed, as the next 24 hours is dominated by headlines from the White House over the President’s health.

Mainland China markets remain closed until Friday for public holidays.

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