The waiting game continues

Stimulus bill deadline expires

House Democrat Leader Pelosi’s Tuesday deadline for a pre-election US stimulus bill came and went overnight, with a deal remaining elusive. However, the fallout was limited to non-existent, as Ms Pelosi said that talks continued with Mr Mnuchin and that progress was being made. Financial markets continue to price in a 100% certainty that a deal will be reached pre-election, with bond yields rising in anticipation and equities firming.

I continue to believe, and the markets keep ignoring, that the real risk to the US stimulus deal is the US Senate. If Republican Senate leader Mitch McConnell refuses to introduce a bill, then the stimulus is dead in the water until post the US election. Nothing from his recent rhetoric or that of other Senate Republicans suggested that they are inclined to back a giant stimulus bill; quite the opposite in fact. One also gets the impression that with one eye on the president’s polling statistic, the close race for the Senate and thus, their own jobs, the Senate Republicans are beginning to distance themselves from President Trump. That would reduce his ability to strongarm the Senate into backing the bill.

Although this Friday’s (Singapore time) last presidential debate promises to be 1.5 hours of exhausting television, it represents one of the last chances for the president to material move the polls in his favour. Failure to emerge as a clear winner will likely increase the self-preservation instincts of the Senate Republicans, making passage of an agreement unlikely to impossible. If a stimulus bill fails to make the election cut-off, it will likely lie in limbo until whoever wins the US election is inaugurated on January 20th, 2021. Over two-months away and a lifetime in the grander scheme of 2020. That is assuming there is a clear winner, and the result is not disputed. Financial markets are blithely ignoring this very real and obvious risk, but readers of this note shouldn’t. The dose of reality bites, if and when it hits financial markets, could be very painful indeed.

Elsewhere the data calendar is quiet in Asia today. Australian Preliminary Retail Sales for September fell by 1.40%, and improvement on August’s 4.20% fall, as lockdowns in Victoria eased. November’s RBA rate decision is still 50/50 hold or cut, and today’s data is unlikely to move that needle. Interestingly, both the Australian and New Zealand dollars fell overnight, even as the US dollar also retreated, and it seems that markets are now anticipating further rate cuts from both central banks soon. That leaves both currencies precariously perched above longer-term support levels.

South Korea’s PPI retreated unexpectedly this morning. PPI MoM rose only 0.10% versus 0.80% expected, with the YoY number falling 0.40% versus 0.10% expected. Export data for the first 20 days of October showed microchip exports continuing to climb but net exports to the US and China falling, with imports also falling. That will be a worry for policymakers, with interest rates near zero and a deflationary environment the last thing they need. Much of the blame can be laid at the feet of the Korean won. It has rallied impressively since mid-September along with the Chinese yuan. We expect the Bank of Korea to increase the pace of its currency interventions seen in recent times, stepping up its purchases of US dollars for Korean won.

The Asian calendar is now bare, with a UK inflation to come this afternoon. Brexit trade negotiations between the UK and Europe remain “in progress” with the risks completely unpriced in either the euro or sterling. Across both, new lockdowns and exploding Covid-19 cases numbers also continued to be ignored entirely and unpriced by financial markets.

Likewise, a US Department of Justice antitrust case was launched against Alphabet (Google to the rest of us) yesterday, with calls for them to be broken up. It also dragged in Apple on its periphery. Expect this theme and Big Tech to be a major story in 2021 under a Biden presidency. Netflix’s quarterly results were disappointing, with Tesla due to announce today as well. Those negatives were summarily ignored by financial markets with the T-FAANGs teeth remaining as sharp as ever.

Without sounding like a broken record or a debating US Presidentus Interuptus, the one lesson we can take is that the US fiscal stimulus package remains the only thing financial markets are concentrating on, to the exclusion of everything else. I am not sure why a US stimulus deal is the magic elixir for the rest of the world’s ailments; maybe it can cure Covid-19 as well? I will ask the US president. It is what it is, however, until it isn’t. I will reiterate the risks though, of material corrections in asset markets if negotiations or the US Senate disappoint.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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