re we looking at a repeat of the dollar melt up in 2016?
As Biden leads in the polls, almost everyone has been talking up the case for a ‘blue wave’ and what scenarios may take place should that happen.
The straightforward one being “buy everything, sell the dollar” of course, but there are some risks associated with that once the euphoria begins to fade.
Over the past ten months, I grew from thinking Trump would easily win this election to thinking that Biden should have this in the bag, judging by the lead in the polls. But now, I’m less confident of that outcome as we approach the home stretch.
I would still argue that the base case remains for a ‘blue wave’ but Trump winning once again and stealing this election is not within the realms of being unworldly, if you ask me.
As a trader, it’s best to be prepared for all outcomes and eventualities, so what is the trade if we do see another four years of Trump in the White House after next week?
Is it going to be the total opposite of the reaction if we see a ‘blue wave’ outcome?
Moody’s cuts the United Kingdom
This isn’t entirely unexpected but you hate to see it. Fitch recently affirmed the UK at AA-, which is the equivalent of Aa3. S&P remains one notch higher at AA but it’s under review.
Moody’s cited three reasons for the sovereign downgrade:
Bold move by the rating agency
The rating was affirmed at AAA but lowered to negative from stable. That’s how you get yourself a lawsuit.
- Cites ongoing deterioration in public finances
- Sees general debt to GDP above 130% by 2021
- Expects deficit to narrow to 11% of GDP in 2021
- Expects US economy to contract 5.6% this year
What Fitch had to say:
The Outlook has been revised to Negative to reflect the ongoing deterioration in the U.S. public finances and the absence of a credible fiscal consolidation plan, issues that were highlighted in the agency’s last rating review on March 26, 2020. High fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus. They have started to erode the traditional credit strengths of the US.
They’re not wrong.
Another risk they cite is the possibility of policy gridlock after the election because neither party will get a 60-seat Senate majority.
Suspend your disbelief and embrace the free-money future
The enthusiasm in markets at the moment is bordering on euphoria. Retail money is pouring into the flavour-of-the-day and now FOMO is taking over more broadly.
You have to decide if you’re in or out. We all know the risks around the virus and the current economic data and it takes a huge leap of faith to pile in here but betting on humanity has been the best bet in world history.
1) We’re in the post pandemic world
Japanese stocks get a boost from more stimulus talk
The government is reportedly going to be pouring another ¥100 trillion at least in a new round of stimulus package, and that is helping to give the Nikkei a bit of a lift today.
The mood elsewhere in the region is more mixed with the Hang Seng down by 1.0% and the Shanghai Composite down by 0.2%, with the former dragged lower amid the clash between protesters and the police in Hong Kong.
US futures are keeping higher by about 0.6% though, but after the setback yesterday, major currencies are keeping on their toes in response to start European trading.
The dollar is a little firmer across the board, but nothing too overwhelming for now. AUD/USD is down 0.2% to 0.6640 while EUR/USD is also lower by 0.2% to 1.0960.
Abe said measures will include fiscal and monetary stimulus alongside tax breaks for companies
- details have not been finalized
- package will be rolled out in an extra budget in 10 days
- size of the package will be greater than that compiled in response to the global financial crisis (total 57 trillion yen) said Abe
Abe spoke during a nationally televised news conference
- “I want to be straightforward”
- “We are in a critical stage. We need to be ready for a long-term battle”
- “The pandemic is inflicting extremely big damage to Japan’s economy”
- “We’ll deploy a huge, powerful package that will include a full range of fiscal, monetary and tax measures.”
The infectious and mortality rates of the new coronavirus have become the main force driving the pendulum of investor sentiment toward fear. The move is all the more dramatic as the investors had been positioned for a continuation of the historic bull market in equities and eager to take on new risks.
The coronavirus has surpassed the earlier precedents of SARS (2003) and the Swine Flu (2009). The World Health Organization declared an international health emergency, which will free up resources and boost efforts to contain the pathogen. It took roughly 20 months to devise a vaccine for SARS, and it is estimated that a vaccine is possible within a month or so now to begin the testing process. Although China is expected to return from the extended Lunar New Year on February 2, more than a dozen provinces and cities will be closed several days longer, which ballpark estimates suggest are responsible for a little more than 2/3 of GDP and 3/4 of exports. Supply-chain and business disruptions will likely last longer still.
Investors fear that the health crisis will turn into an economic crisis. Although President Xi is understood to be the strongest Chinese leader in a generation, the challenges that China faces are immense: US rivalry and trade conflict, Hong Kong, Taiwan, and a highly leveraged domestic economy underpinned by a deteriorating demographics. China recently reported its birthrate fell to a record last year. Still, some argue that the situation is even more dire as the official figures exaggerate both the population and the birth rate. More monetary and fiscal stimulus is expected to be delivered to cushion the impact. Some forecasts show the Chinese economy slowing to around 4.5% in Q1 20 from 6.0% in Q4 19.
Since the onshore yuan (CNY) stopped trading for the holiday, the dollar appreciated by a net of a little less than 1% against the offshore yuan (CNH). A catch-up move of roughly the same magnitude would bring the greenback toward CNY7.0. While the last time the dollar rose through that threshold, the US accused China of currency manipulation, this time is considerably different. Moreover, of all times, this is the time when China could likely get away with manipulation if it wanted. It is not just because of the macro shock, but also because the US has played the card once and relatively quickly reversed itself. (more…)