Georgia on my mind

Georgia election too close to call 

The first week of the new year brings plenty of potential volatility, meaning those looking to ease gently into 2021 are likely to be disappointed. The US state of Georgia’s double-senate runoff election tomorrow looms as the week’s critical event risk. The result will determine whether the Republicans or Democrats will control the Senate, with the Democrats needing to win both seats. The result will have profound implications for the United States.

A win by the Democrats will leave them in control of all three legislative bodies and potentially an unfettered legislative path. If the Republicans win just one seat, they will control the Senate and will almost certainly make the incoming President Biden’s life as difficult as possible. That almost certainly means no more fiscal stimulus and imperil any other initiatives that President Biden wishes to make. The Democrat’s poor performance at the November election will be thrust back into the spotlight.

As usual, polls have the result as too close to call. An excellent place for the industry to be given their equally appalling performance over the past two national elections. A Republican win should be market positive initially, with equities rallying and the US dollar falling as financial markets breathe a collective if selfish, sigh of income tax relief. Conversely, a Democrat victory should have precisely the opposite effect. Any equity sell-off post a Democrat victory should not last for more than a few days, as unlimited zero per cent money from the Federal Reserve trumps all.

Ray Charles had Georgia on his mind, as should we all this week as a key volatility source. Further complicating the picture is that a close election (as the polls suggest) means that a clear result may not emerge on Wednesday Asian time. The counting and recounting could drag on for days. You have been warned.

OPEC+ meets virtually for the first time today to review production cut targets, the first meeting of their new monthly cycle. Oil markets are resilient this morning, but it remains to be seen if the recent rally in prices loosens OPEC+ discipline and unity. Large dollar signs in front of members have previously been too tempting an apple for OPEC+ members to resist. Russia, in particular, is apparently keen to increase quotas, although they won’t be alone. It is also very likely that OPEC+ will reach no decision today, and the meeting will drag on like an American election. When the well is capped though, I expect discipline to hold this month with no increase in production in January. Assuming oil prices are here or higher next month, and that vaccine rollout accelerates, all bets will be off for the next meeting in February.

The week has plenty of entertainment elsewhere though. US ISM Manufacturing is released tomorrow, the FOMC minutes on Wednesday and Eurozone CPI and German Factory Orders on Thursday, along with US ADP Employment and Initial Jobless Claims. Although the week’s data calendar is the show with everything, much of it will be drowned out by the noise from Georgia’s senate elections and President Trump’s Twitter account. The week concludes with Friday’s US Non-Farm Payrolls, with new jobs expected to fall to 100,000 after retreating yet again to 245,000 last month. Overall, the data should show that manufacturing across Europe and the US remains resilient, but Covid-19 is eroding employment gains. That said, I expect the markets to yell “vaccines,” and quickly move on.

Today is Purchasing Manager Index (PMI) Monday, being the first Monday of the new month. The pan-Asian releases today have mostly shown continued improvements to their December manufacturing PMIs. Australia, Japan, Malaysia, Taiwan, Thailand, Vietnam and Indonesia all climbed further into expansionary territory. Malaysia and the Philippines at just above 49.0, are also close to moving into expansion territory.

Only China’s Caixin PMI slightly disappointed. It fell from 54.9 to 53.0 in December but remains well above the 50.0 expansionary marks. The Caixin index contains a heavy SME weighting which usually lags the SOE-heavy official NBS PMI’s. China should get a pass mark this time, with the rest of Asia showing a continued path of improvement and resilience. That reinforces my view that Asia will outperform in 2021, leading the world out of the pandemic recession.

Despite the doom and gloom in the press last week, the UK quietly slipped out of the European Union on January the 1st without incident. Admittedly, with the EU and the UK on New Year’s breaks, we have yet to see if thousands of trucks back up on both sides of the English Channel, or if supermarkets start running out of fresh produce. I highly doubt that the EU wishes to put Britain under an effective naval blockade and remain of the opinion that the doom-mongering is overdone until presented with evidence to the contrary. That probably explains sterling’s resilience this morning.

Both the EU and Britain are grappling with an escalating Covid-19 situation and have more important fish to fry. Germany has indicated it will extend lockdowns, as has the United Kingdom; a pattern inevitably to be repeated across the continent. Things are likely to get worse in the EU and Britain before they get better with Covid-19. Britain appears better placed to improve sooner, having been far more proactive on vaccine production and rollouts if anything. Another reason not to sell sterling at the moment.

Japan is finally joining South Korea and Thailand in at least mulling a more active response to its Covid-19 situation. That is weighing on Japan’s stock markets today. In Japan, governments move slower than a calving iceberg in the Antarctic. After an interminable period of vacillation and denial, it appears to be considering Tokyo’s request for a state of emergency in the city and surrounding prefectures. Tokyo’s potentially belated partial lockdown will weigh on Japanese equities this week, but not currency markets which are a dollar story.

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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