China continues to be a bastion of calm in an uncertain world, with economic data delivering once again to calm investor anxieties in what will likely be the second-most anxious week of the year. After a Covid-19-induced nervous opening, China’s Caixin Manufacturing PMI outperformed, printing at 53.6 versus 53.0 expected. That followed solid official manufacturing and non-manufacturing PMI’s released over the weekend.
Across Asia, the first of month PMI release schedule showed Asian economies either maintaining above 50.0 expansionary gains or improvements over September for the laggards, notably Japan. The notable exception being Malaysia which fell to 48.5 from 49.0. Malaysia faces a busy week amongst the noise internationally, with Bank Negara expected to hold rates steady tomorrow and the government expected to face a vote of confidence of its 2021 budget in parliament on Friday.
The US elections will dominate the week, with results rolling in across Wednesday in Asia. I will not dwell too long on this event today; it has been analysed to death elsewhere. I maintain that the Senate race is the crucial one and will have the most impact on markets. A Republican Senate will be an immediate negative, but probably the best outcome for equity markets longer-term. Massive fiscal stimulus and much higher taxes will be off the table in this scenario.
Central banks in spotlight
Elections aside, the week is a busy one anyway. We have rate decisions additionally from the RBA tomorrow, and the FOMC and Bank of England on Thursday. The RBA is 50/50 for a cut to 0.10% from 0.25% tomorrow. I believe their preferred action will be to increase the size of their QE programme, though. The same will apply to the Bank of England on Thursday as Britain’s one-month national lockdown begins. The FOMC will stay put, possibly with one eye on a potentially contested election at that stage. All three will be uber-dovish, emphasising that they stand ready to do “whatever it takes” to support their economies.
Being the first week of the new month, the global data schedule is incredibly heavy. It culminates in Friday’s US Non-Farm Payrolls, which are expected to add 600,000 jobs, slightly lower than September. China releases Caixin Services and Composite PMIs on Wednesday, expected to be another set of strong prints, as China outperforms the world. That should act as a stabiliser to the uncertainty of the US election for the Asia region.
If China is the rock of Asian stability at the moment, the world is far less certain elsewhere. Covid-19 cases continue to break records in the US in election week, with its impact only muted by the fact that 90 million Americans have voted early, including the president. Europe continues to be of deep concern, with Britain announcing its new national lockdown lite Saturday, and by my count, Belgium, Greece, Austria and Portugal all joining them to varying degrees. The jury is still out on whether the have-your-cake-and-eat-it approach will work. The downstream effects on consumption though have manifest themselves, most obviously on oil. Oil prices were stretchered off at the Asian open today, and are still receiving treatment on the side-lines, even as equities receive a China boost.
Ant Financial’s shares also start trading this week. Over USD3 trillion of orders were received by the managers of the IPO, with trading set to begin in Shanghai and Hong Kong on Thursday. I continue to be concerned that Hong Kong brokers are offering retail investors 20-1 leverage to participate. There is never just one cockroach, and the only mitigation is that demand is so strong, most retail investors are likely to receive minuscule allotments. That minimises their risk if prices fall on the first day, if the world stags the shares, or events elsewhere in the world have markets in turmoil.
Although Asia-Pacific markets have received a China sugar rush this morning, there will be limits to its longevity. With so much event risk ahead on so many fronts, I continue to expect investors to take risk off the table. That is at least until we have a clearer US election picture on Wednesday in Asia, or not. The US dollar and the Japanese yen should outperform until at least Wednesday, and possibly precious metals if they can shake off their equities thrall. Equity rallies are probably there to be sold into, and energy prices will remain in the naughty corner.
