Central banks preach accommodation
I never thought the Eagles would offer insights into global monetary policy, but it’s 2020 and nothing should shock us anymore. In the past few days, officials from the Federal Reserve, Bank of Japan and the Reserve Banks of Australia and New Zealand, (I may have missed some), have all been singing that they will take it easy for as long as it takes, and will be even easier if necessary.
For the rest of us, that flood of money means that the disconnect between equity markets and the real world, is set to continue for some time to come. As tech stocks in the United States powered the S&P 500 and Nasdaq to another record close, it is perhaps best to quote the Eagles again. “Don’t even try to understand. Just find a place to make your stand, (long everything) and take it easy.”
The headlines in Australia are loudly proclaiming the lucky country has fallen into its first technical recession in 25 years. That followed the release of Q2 GDP data that showed a fall of 7.0% for the quarter, somewhat worse than expected. One recession in 25 years is a dream result for any country, but we expect the Q3 data to show an uneven rebound, skewed by the Victoria lockdowns. Therefore, the recession itself is likely to be relatively short.
It followed the announcement that China has ramped up its baseball bat diplomacy with Australia, banning barley imports from the largest Australian exporter after “pests” were found, following the launch of an inquiry in Australian wine flooding. Notably, China has left Australia’s holy trinity of thermal coal, iron ore and copper ore with their kneecaps intact. Further reinforcing that China’s actions are politically motivated but confined to peripheral exports and not the ones it really needs.
That line of reasoning may explain the price action on Australia’s increasingly schizophrenic stock markets. Having slumped yesterday, Australian markets have rallied strongly today despite a plethora of adverse headline risk. Investors appear to be comfortable that the lucky country will remain so, with the official recession to be short-lived, and the core of Australia’s exports to China left unmolested by Beijing.
The world did have reason to be slightly cheerier overnight. German PMI, and US ISM Manufacturing New Orders and ISM Manufacturing PMI for August all strongly outperformed. The news from the United States was particularly pleasing, given the scale of that countries Covid-19 outbreak. The FOMO-gnomes of Wall Street needing no more signals to hit the buy buttons and propel stock markets to new highs. Interestingly, US yields continued to move lower though, reinforcing the feeling that the US recovery will be a non-inflationary one and giving the street more reason to sell the US dollar.
In Asia, the Thai Finance Minister resigned yesterday, ostensibly on health grounds, after only one month in the job. That comes against a backdrop of rising tensions in the land of smiles one, as large parts of the population vocally bristle against the pseudo-military government, and the economy remains severely weakened by the Covid-19 pandemic. The Finance Minister’s announcement shook the confidence of investors, suggesting that all is not well in the corridors of power in Bangkok. The Thai baht has sunk from 30.950 to 31.250 over the past 24 hours. With no news of a replacement, the baht is likely to be a regional underperformer for the near future.
Indonesia is also struggling to maintain confidence in the rupiah. The Central Bank Governor reiterated that that IDR is undervalued this morning, but investor disquiet is rising following the direct monetisation of government bond issuance earlier this year. The latest source of unease is a draft law released this week that will undermine the independence of the central bank vis-a-vis monetary policy. The intention is to create a “Monetary Policy Council” composed of outsiders including the Finance Minister with only minor representation from the central bank.
The potential reversion of Indonesia to a pre-1999 setup is a concerning development and could undermine a key source of confidence by international investors. The IDR has fallen 1.60% versus the US dollar today, its third fall in as many days. At 14,805.00 this morning, USD/IDR is not far shy of critical resistance at 14,900.00. We expect the central bank to be out in force, intervening to defend 15,000.00. Indonesia is walking a very fine line with international investors at the moment, and the risks are rising that its luck could run out.
The data calendar for Asia and Europe for the rest of the day is a quiet one, with strictly tier-2 releases. This evening, the US will release Factory Orders for July. Orders are expected to hold steady at around 6.0%. After the impressive ISM data overnight, a number anywhere near expected should be enough to keep the disco lights flashing on the buy everything party.
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