Equity immunity fades

US dollar rises

The new economy/old economy rotation trade continued to lose momentum overnight. Technology stocks recovered from some of their beatings from earlier in the week, and the US dollar rose again overnight on the back of a steepening yield curve. Volumes were much lower than previous days with the US government and US bond market closed for Veterans Day.

Despite initial data from yesterday’s Singles Day suggesting that Alibaba had doubled sales from 2019, China bigtech remains in a funk, weighed down by impending Chinese government regulations to limit their power and open up the domestic market to new competitors. China’s tech behemoths have collectively shed over USD290 billion in market cap over the past couple of sessions, with price action today suggesting the market is not yet done.

Vaccine hopes have quickly run into reality on the ground, with US Covid-19 cases hitting new records. New York tightened restrictions overnight, with New York Governor Cuomo threatening to ratchet them higher again if cases continue to climb. The Pfizer BioNTech vaccine news is a double-edged sword for Europe and the US, as health officials worry that vaccines hopes will lead to less social discipline amongst their respective populations. Sadly, things are likely to get worse before they get better.

Financial markets completely ignored the news that a Georgia vote recount is imminent. My understanding is that the margin of Mr Biden’s win would trigger a recount anyway under Georgia law. What is clear is that from a market’s perspective, the presidency is a done deal, with the Georgia Senate run-off in January of greater importance. The two seats up for grabs could draw the Democrats even in the Senate and unlock their legislative agenda, including heavy fiscal stimulus.

In all likelihood though, the Republicans will maintain control, capping a poor performance this election by the Democrats, who have come very close to snatching defeat from the jaws of victory two elections in a row. Markets, though, appear quite comfortable with either outcome. More volatility is far more likely from the power of the Trump-tweet. That volatility is mostly going to be short-term in nature, though.

China announced an additional “quarantine” measure for Australian logs today. It continues to slowly turn the crews on great swaths of Australia’s export industries, leaving only the critical imports of iron ore and natural gas untouched. You can be 100% sure that China is working hard to diversify those sources in the years ahead as well. More so than the US elections and vaccines, I am quite amazed there has been no apparent negative responses in Australian markets to this escalating state of affairs. China may well have to answer in the WTO for its actions, but that won’t help Australia in 2021.

Part of this situation is Australia’s own fault, picking a fight with Beijing having allowed it to become the buyer of last resort for so much of what Australia exports. Australia’s situation shows the perils of concentration risk to other countries and the danger of being a one-trick pony. I suspect once the US political and vaccine news dies down, this story will yet return to haunt Australian asset markets.

South Korean export and import prices remain in deeply negative territory this morning, although I suspect that is mostly driven by the considerable appreciation of the won. Japan’s Machinery Orders for September were down 11.5% YoY, although I expect that to have improved in October. Frankly, any data from September of Q3 anywhere in the world is old news in 2020. October PPI in October also remained negative, driven by falling energy and chemical prices. Japan remains as far away from inflation as ever, something you could probably have said for the last 30 years.

US Core Inflation for October will be of passing interest this evening, given the recent steepening of the yield curve. A worse than expected number may dial back some of the vaccine steepening and see the greenback resume its downward path. US Initial Jobless Claims are expected to edge lower for the week to 735,000, defying the predicted Covid-19 slump. If that plays out, any fiscal help from a Republican Senate will be further away than ever and may also see US yields, and the dollar, edge lower.

Overall, I am expecting a modestly positive day for Asia, after a partial holiday in the US overnight. Big-tech developments aside in China, Asia will be content to see how events play out elsewhere, notably in the United States.

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