Monday, July 4, 2022

RBA Implements Rate Cut, All Eyes On U.S. Election


The answer is almost! The most divisive election in Western democratic history commences today as those Americans who haven’t voted head to the polls. Results will start flowing in through the morning tomorrow in Asia, which should make for a friskier than usual session. Today, markets will turn themselves inside out and enter a state of analysis paralysis trying to forecast what asset class will do what under what scenario. My advice is to stay out of the noise and enjoy the show, your net worth and blood pressure will thank you.

Looking past the election, no matter who wins and in what combination and with what policies, certain things will remain the same. The world economy ex-China will remain in a recession, albeit on a modest recovery trajectory. Movement between countries will remain restricted and crimp those recoveries. Every central bank in the world will remain uber-dovish with their hands on the monetary policy spigots. We will still be living in an unlimited free money zero percent world. The US will still be running trillion-dollar deficits even without stimulus.

That will mean that asset price inflation will resume in earnest as the world’s central banks send economic inequality to extreme levels to keep the economic lights on. Their backstopping of even the dumbest business decisions should be good for equity prices into 2021. The US fiscal situation will likely see further debasement of the US dollar in 2021. I am sure the Federal Reserve will be moving to a BoJ yield curve control. In a nutshell, buy everything and fund it with zero percent cheap US dollars. Let’s all hope for a decent bout of inflation in a couple of years’ time to inflate the world’s accumulated government debt away. It worked after World War Two with the US; some strategies are timeless.

Overnight, markets received a boost from the global manufacturing PMI dump. Asia and Europe mostly outperformed, with China, Germany and the United States all standouts. That was enough for Wall Street to put election jitters behind them and load up again on equities and pro-cyclical risk assets. A massive caveat for Germany and Europe now will be the new COVID-19 lockdowns of course. The “risk-on” tone of the overnight session is likely to run out of steam today, however, as the US polling booths open. I still see the potential for short-term equity weakness, a firmer and more gains by , especially if the result is close but inconclusive tomorrow. You might want to pop some and in there as well.

Never to be outdone, the was in action and implemented a modest rate cut to 0.10% from 0.25%. As well, the RBA also increased their QE targets. I expect that the central bank will remain dovish in its outlook and prepared to do “whatever it takes.” That should be currency positive, but AUD gains will be limited by pre-US-election risk hedging. is up 0.40% today.

Bank Negara Malaysia releases its latest interest rate decision this afternoon at 1500 SGT. With one eye on Friday’s tabling of the 2021 budget in parliament, with the accompanying vote possibly deciding the fate of the government, I expect BNM to hold fast at 1.75% and keep its powder dry for potentially more tumultuous times ahead. The central bank will also be casting a wary eye on the resurgence of COVID-19 in the country, with its downstream economic effects. Again, I expect them to keep their powder dry rather than squander their yield advantage too soon. Broadly, it should be Malaysian equities negative, and currency positive, but only modestly so.

The rest of the day’s calendar across the world is strictly second tier. But who are we kidding, we could have every major central bank in the world announcing today, but it would matter not. The only show in town is the US election, with the greatest show in earth reaching its season finale this evening. I will remind viewers though; we do have an FOMC meeting and US Non-Farm Payrolls later this week. Life does indeed, go on. In the meantime, sit back and watch the most highly anticipated television since the last episode of the Game of Thrones; oh the irony.

Original Post

Source link


Please enter your comment!
Please enter your name here



Related Stories