Finally, Back To The Economy

The election of President Elect Biden marks a new dawn for the US and the world.  The world had held its breath since Tuesday’s US election, wondering whether there would be four more years of the same or change.  A new Democratic President elect together with a split Congress, is arguably one of the best outcomes that markets could have hoped for, notwithstanding the fact that President Trump refuses to accept defeat. 

While the Senate is still up for grabs it seems more likely than not to stay in Republican hands; the Georgia run offs on 5 January could result in 50-50 in the Senate and effective Democrat control via Vice President elect Harris, but the probability of this is small.  As such, there seems little prospect that a Republican led Senate -– will be pliable to President elect Biden’s biding. 

Why is this good for markets?  It means that policies and members of Biden’s cabinet will likely veer towards more centrist as opposed to leftish aims.  It will for example, be difficult for Biden to hike taxes, which will take out some of the sting from a likely smaller fiscal package than Democrats had hoped for. And limited fiscal spending may keep the onus on the Fed to provide liquidity, underpinning markets further.  

Now that the Presidency has been decided, attention will turn at least in part, back to Covid and the economy.  Neither look encouraging.  Covid cases in the US have reached record levels.  US October jobs data released at the end of last week revealed an above consensus 638,000 increase in non- farm payrolls though the level of payrolls is still down a sizable 10.1mn from the level in February and the fading CARES Act spending alongside surge in Covid cases indicates risks to any further improvement going forward.

Top tier data is limited this week in the US, with inflation (CPI) as the main release on tap (Thurday).  Nonetheless, risk assets/equities are likely to continue to take on a positive tone in the wake of the election outcome. The USD is likely to remain under pressure as risk assets rally. 

A Biden presidency, split Congress bodes well for Asia.  The US stance on China would likely be more nuanced and US stance on trade would likely be more supportive.  As revealed in China’s October trade data over the weekend, exports are holding up particularly well even ahead of a Biden presidency; exports rose by a very healthy 11.4% y/y in October.  

The USD is likely to depreciate in the months ahead in the wake of a Biden win/split Congress, while US rates are likely to remain suppressed, which all point to Asian FX strength.  Fundamentals also point positively for Asia. Much of the region is recovering well from Covid related weakness, led by China, which now appears to be firing on all cylinders.

CHF and JPY remain on top

It’s been a tumultuous few week for global markets. First a debt deal in Europe and then a debt ceiling agreement in the US. In both cases any boost to sentiment has and will be limited. Europe’s debt deal, while comprehensive, left quite a few questions in terms of implementation, scope and mutual country agreements.

In the US the deal to raise the US debt ceiling by $1.2 trillion hammered out between Republican and Democrat party leaders helps to stave off a debt default but is far smaller and less comprehensive in terms of deficit reduction measures than had been hoped for and may still be insufficient to prevent a credit ratings downgrade by S&P and/or more ratings agencies. The deal will prove a disappointment to USD bulls.

Markets in the US have failed to find much to rally them despite the debt deal. Indeed, all that has happened is that attention has shifted back towards economic growth worries in the wake of a disappointing ISM manufacturing index in the US (50.9 in July, a reading which is just about in expansion territory) which follows on from a run of soft data in the US including the Q2 GDP report. Unfortunately data elsewhere is no better as a series of weak manufacturing surveys have highlighted this week.

Weak data and the US debt deal have pushed Treasury yields lower but despite this the USD has rallied, especially against the EUR, which is not only suffering from renewed peripheral debt concerns and weaker growth, but also from a run of disappointing earnings releases in contrast to the US where earnings have on the whole beaten forecasts. The USD may have benefited from a renewed increase in risk aversion and in this respect further US equity weakness may provide the USD with further support.

Whether EUR/USD will extend its recent losses is doubtful, however. Much will depend on Friday’s US July jobs report and if there is another weak outcome as looks likely, speculation of another round of Fed asset purchases could dent USD sentiment. The currencies that remain on top in this environment are the CHF and to a lesser extent the JPY much to the chagrin of the Swiss and Japanese authorities

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