Mind the stop-gap

Asian markets directionless

Asian markets are drifting today, in line with the North American session, after bi-partisan politics once again delayed a US fiscal stimulus agreement.  No deal was forthcoming, with the issue of state and local government support once again, the sticking point between Republicans and Democrats. The annual horse-trading over the US Government’s funding by Congress for 2021, also arrives on December 11th, making for a stimulus/funding double witching hour.

The plan appears to be to pass a one-week stop-gap funding bill and roll both packages up into one omnibus agreement next week. That is, assuming an agreement can be reached. The situation highlights the challenges a Biden administration will face with a Republican-led Senate in the coming years. As well as underlining the poor performance of the Democrats yet again in a federal election, once the Biden noise is stripped out, it also highlights how important the double Senate seat re-run in Georgia will be in early January. That remains the Democrats’ last hope of breaking the Senate deadlock or face two years of potential gridlock until the next mid-terms.

With those Senate elections in mind, both sides have a strong incentive to reach an agreement. Employment in the US is clearly slowing, with state-level and city-level Covid-19 lockdowns ratcheting ever higher, geopolitical tensions between the US and China just won’t go away.

That was enough for investors to take some risk off the boards. US bond yields edged lower and equity markets has a mixed day, with investors rotating back into tech stocks at the expense of recovery stocks. Gold was the night’s outperformer, jumping 1.40% on haven flows. As I stated yesterday, I now believe the worst is over for gold, and it traced out a structural low last week.

That has flowed through to Asian markets, with the region stock markets mixed today, with new US sanctions on 14 Chinese officials weighing still on mainland and Hong Kong markets. Any pullbacks in asset markets are likely to be only temporary blips, however. Monetary policy has the back of asset market valuations, and both the Republicans and Democrats have strong incentives to get something done, we may just have to wait a week.

Speaking of stop-gaps, the Caligula of supplementary budgets, Japan, will release supplementary budget number three today. At over USD700 billion, the headline number is impressive, although the previous USD2.2 trillion of spending has only managed to keep the lights on in Japan through Covid-19. Exports and manufacturing have recovered, in line with the rest of the world, but domestic consumption remains subdued, to say the least. The budget is unlikely to be market-moving as the spending will be tilted towards longer-term growth and diversification of Japan’s economy, not an instant big-bang today. What markets wouldn’t give to see those numbers thrown around in the United States?

China banned another Australian beef importer overnight, as the Australian federal government passed a law giving them the power to scrap or veto over state’s investment agreements with foreign powers (read China). The law extends across many sectors, including research partnerships with universities. Although the Australian dollar had a choppy session overnight, neither it, nor Australian equities show any sign of buckling under China’s trade strain.

Australian economic data continues to outperform, with today’s NAB Business Confidence jumping to +12 this morning. Lower for longer interest rates, US dollar debasement, Covid-19 vaccines and US fiscal stimulus continue to be the main games in town. China’s silent trade war with Australia will likely be a 2021 story, not a 2020 story.

Singapore will need to ramp up imports of champagne and prawns for the sandwiches in 2021 and find a lot of private jet parking space. After the World Economic Forum announced, it moved its annual get together of the powerful, rich and famous to Singapore in May. With the meeting held in person, we now know who will be the first people at the front of the vaccination queue. Ironically, the carbon footprint of all though private jets, and the amount of hot air released into the atmosphere by politicians and billionaires is enormous. At least it has been scheduled before Indonesia’s burning season, so beloved by us lowly regional dwellers. We will all be told to emit less, and that we’re all going to be replaced by robots. But scoring the WEF is a massive win for Singapore and a vote of confidence for the city-state in 2021.

The Brexit trade negotiations are hanging by a thread, with Prime Minister Johnson flying to Brussels in person to meet EU officials this week, in a last-ditch attempt to close an agreement. Sterling recovered some of its losses overnight, but will remain extremely choppy in a 300-point range. Markets are still pricing in practically a zero chance of a no-deal scenario. The fall-out on sterling will be emotional if that is proved wrong. Of one thing I am confident, sterling will be a lot higher, or a lot lower by this time next week; I just can’t tell you which.

Overall today’s session is a waiting game. That means that risk will likely be taken off the board temporarily until the tea leaves make for more precise reading. It does not change the premise that the only way is up for asset prices, commodities and precious metals in the longer-term picture.

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
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is 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, Channel News Asia as well as in leading print publications including 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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