Submitted by Michael Every of Rabobank
Markets are trying–oh how they are trying!–to pretend Monday and parts of Wednesday didn’t happen. “For every dark night, there’s a brighter day,” they say.
Case in point, US-China relations have taken another leg down. In this case, Chinese-backed media, and one Chinese diplomat, have published a photograph of Julie Eadeh, a political counsellor at the US consulate in Hong Kong, meeting with opposition leaders, and have publicly declared this as proof that she is instigating ongoing protests. That’s after Wednesday saw the China dub the same protests an attempted “colour revolution”, code for a CIA attempt to topple regimes. The US response from the State Department was to call China a “Thuggish regime”. Very foreign-investor friendly! But is that worse than “strategic rival” (source: Pentagon) or “ideological threat” (source: National Intelligence Agency)? Let’s hope Hong Kong doesn’t get too thuggish this weekend.
Of course, the market shrugs at thugs. (Which is why critics wonder if it is wise for the West and its “Western values” to place markets as the be-all-and-end-all of everything.) However, when US President Trump–or ‘2-rum-Pac’–holds off on letting US firms re-start selling tech inputs to Huawei, things look more serious. You step up to Huawei and you get smacked down. That’s the rule of the international street. Indeed, US Treasuries have caught a bid again, and USD/CNH rose to 7.09 before settling at 7.08. Today’s CNY fixing was 7.0136, again well below yesterday’s close, but again a step lower.
Ironically, this once again underlines that while Trump-Daddy can be an O.G. and wield tariffs and trade restrictions, and can use them to get the Fed to lower rates, he can’t get the USD down too. Indeed, he couldn’t do that even if he filmed himself in a stretch limo (complete with gold toilet) burning piles of USD and waving wads of Euros. For example, the below Tweet did little:
“As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing, John Deere, our car companies, & others, to compete on a level playing field. With substantial Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will make it possible for our companies to win against any competition. We have the greatest companies in the world, there is nobody even close, but unfortunately the same cannot be said about our Federal Reserve. They have called it wrong at every step of the way, and we are still winning. Can you imagine what would happen if they actually called it right?”
Europe is meanwhile caught up with its own street dramas. It would appear Italy is heading to an early election, and one where the populist anti-EU League is likely to at least double its support at the expense of the Five Star Movement. The “idealists” I referred to yesterday will be looking at the polls and trying to work out what combination ends up with a government that can’t do anything populist – for example, might the League have to sit with Berlusconi’s Forza Italia? The “realists” will note that in that instance Forza Italia might look a lot more League-like and that it may be possible the League sits with even further right-wing forces. With Italian 10-year yields at 1.53%, clearly the idealists remain in the driving seat for now though.
The UK also has got its own problems with the notorious B*O*J*O, where the latest rumours are over the suggestion that even if he loses a vote of no confidence he will refuse to step down to get Hard Brexit over the line on 31 October via deliberate inaction. (Technically, he wouldn’t have to as he would have two weeks to try to reassemble a new government, but frankly the UK’s unwritten constitution is being made up as it goes along at this stage.) Indeed, preparations appear to be underway for a snap UK election on 1 November AFTER Brexit, in whatever form that may be, in the event of a successful no-confidence vote in B*O*J*O; that raises the potential for a “Let’s go straight back in again!” vs. “It was us what won it!” electoral platform. GBP is still hovering around the mid 1.21 level as it watches this brawl unfold.
And in Australia Governor Lowe has given his semi-annual testimony, which made clear that he now sees the street wisdom of the RBNZ, stressing that further rate cuts are on the table, and that trade disputes are generating considerable uncertainty for many businesses. He didn’t mention the US proposal to host nukes aimed at China in Darwin, and what the Chinese response to that would be. (Think South Korea and THAAD a few years ago: Aussie exports could be Straight Outta the Chinese Market.)