President-elect Biden Announces Stage One Of His Spending Plan
President-elect Biden unveiled his bag of stimulus goodies this morning, with an impressive headline figure of $1.90 trillion. None of it appears to be funded by tax increases, so another torrent of bond issuance is on the way. By my rough reckoning, the US has spent nearly $4 trillion on backstopping the economy since the start of the pandemic. All of it funded by debt. Mind you; the Trump administration was running a trillion-dollar deficit even before Covid-19, so deficits are definitely not just a Democrat problem.
Thankfully, Federal Reserve Chairman Jerome Powell overnight signalled that tapering the Fed’s bond-buying targets was not even considered at the moment, nor would it be for the foreseeable future. Given the amount of issuance coming, that is a good thing. The incoming Yellen-Powell axis may yet have to ponder a Japan-style yield curve control strategy though before 2021 is out.
The Biden announcement overnight though was just stage-one of his spending plan. Next will come the Biden “New Deal” remaking America package. That will also be several trillion one would think. I’m all for counter-cyclical government investment, especially when debt is so cheap. But Mr Biden’s next plan will almost certainly require tax increases to pay for it.
And herein lies the rub, namely the US Senate. The Democrat majority in the House should be sufficient to ensure the passage of Mr Biden’s wishes. The Senate though is another matter, even with a Vice-Presidential 50-50 casting vote. Not all of Mr Biden’s spending wishes can be passed with a simple Senate majority, notably the aid to States and Municipalities. It runs into a process called reconciliation and the Byrd rule that can only be overridden by 60 Senate votes.
I won’t try to explain reconciliation and the Byrd Rule to readers. Having wrapped a cold towel around my head the past day or so trying to understand it, I still got a headache. The general gist seems to be that Congress gets three one-shot simple majority bills on revenue, spending and the Federal debt limit. After that, anything else has to be “reconciled” by “committees” (I’m already crying as I am impatient by nature), and certain areas such as State Aid and Social Security automatically go into this process. Otherwise, it can be “filibustered” in the Senate, doomed to a Ground-Hog day hell of never-ending political delay unless the Senate acquires 60 votes to override it.
So that is the challenge President-elect Biden faces immediately on taking power next week. Given the distaste Republicans have for state aid, Mr Biden’s bi-partisan hopes will be immediately tested. We have no visibility from the Republican Senators about how bipartisan they will feel, if at all. And that is before the remake America bills come through with the almost certain increases in taxes. The US Senate minority may yet filibuster the hopes of President Biden. On a more positive note, getting the bad news out of the way on the fiscal front may be a wise move for both parties, leaving plenty of time to salve wounds before the 2022 mid-terms.
That may explain the neutral response by financial markets in Asia after the stimulus package details were unveiled. Talk is cheap, especially when the contents were already well telegraphed and disseminated. Financial markets in North America had already spent much of the day in wait-and-see mode, and Asia appears to be on much the same course.
Any bullish tones were muted overnight by the sharp deterioration in US Initial Jobless Claims, which jumped to a seasonally adjusted 965,000. Following on from an abysmal headline Non-Farm Payrolls number last week, it appears that Covid-19 restrictions are eroding employment, notably in the services sector. One positive note could be that it may focus the Republican Senate minority’s attention on bi-partisanship benefits, at least early in the Biden administration.
Adding to the notes of caution in Asia were sanctions on Chinese companies and their officials by the outgoing Trump administration overnight. Oil giant CNOOC and some of its officers were slapped with sanctions over alleged bully-boy activities in the South China Sea. Phone maker Xiaomi Corp., and civil aircraft maker Comac were on a list of Chinese companies added to the US no investment list for various reasons, mostly national security related. The restrictions will hit Comac particularly hard. In their wisdom, the US and French aerospace companies have packed Comac’s civil aircraft so full of their high-tech products, that stripping them all out would leave an engineless shell with a tail and a fuselage.
The incoming Biden administration has been deafening in its silence regarding China relations and those with allies that rely on the US for security, but happily do business with China and Russia. Yes, I am talking about you, Germany, among others. The new administration will likely not be as belligerent but may also not be as willing to unwind Trump-era policies as many might hope. The overnight US restrictions and lack of clarity may temper bullish spirits in Asia until after the Biden inauguration and diplomatic clarity.
Equities in Asia edge higher.
Wall Street was content to mark time awaiting the unveiling of the Biden stimulus package overnight. The S&P 500 eased by 0.14%, the Nasdaq fell just 0.12%, and the Dow Jones edged lower by 0.22%. Post the package unveiling; after-market US index futures have remained slightly negative.
Asian stock markets have, by and large, moved modestly higher today, with the headline numbers of the Biden package a positive for cyclical recovery sentiment. That excitement, though, is being tempered by the challenges of the new administration in passing the package through Congress, and the new sanctions imposed on Chinese companies overnight.
The Nikkei 225 is unchanged, but the South Korean Kospi has fallen by 1.0% after the Bank of Korea left interest rates unchanged this morning at 0.50%. Hopes had risen for a surprise rate cut after soft labour market data earlier this week. In China, the Shanghai Composite has risen 0.40%, with the CSI 300 just 0.10% higher, with overnight sanctions by the US falling more heaving on companies and sentiment in that index. The Hang Seng is up only 0.40% today for much the same reasons.
Regionally, Singapore nifty has climbed 0.30% with Kuala Lumper up 0.10% with Jakarta and Manilla unchanged. Australian markets have risen modestly, the All Ordinaries and ASX 200 moving 0.30% higher.
Currency markets are unmoved by Biden wish-list.
Currency markets entered a holding pattern overnight, ahead of the Biden stimulus release, and have remained to circling in Asia this morning. Part of the reason is that the fiscal package contents were well telegraphed beforehand and contained no reactionary surprises. This past week, a significant driver of currency movement, US Treasury yields drifted overnight, with poor Jobless Claims and a very dovish Jerome Powell dampening upward pressure from the Biden package.
The dollar index edged lower by 0.13% to 90.25 in directionless trading and is unchanged in Asia today. EUR/USD and USD/JPY were almost unchanged, although GBP/USD, NZD/USD and AUD/USD also rose by 0.60% ahead of the Biden stimulus announcement. All three have pro-cyclicals have seen some profit-taking in Asia today.
Although the Chinese Yuan held steady at 6.4700 today after the PBOC fixed USD/CNY at a neutral 4.4633, Asian regional currencies renewed their ascent overnight versus the US Dollar. The Singapore Dollar, Korean Won, Indonesian Rupiah and Malaysian Ringgit all traced out modest gains, as investors returned to the pro-cyclical recovery trade after Dollar strength faded. Asia trading has been very muted though, with most regionals unchanged on the day.
Asia markets appear content to coast out the last day of the week, with the data calendar international very low on releases likely to have much market impact. The last weekend of the Trump presidency may also be discouraging new position-taking as attention turns to next week’s inauguration.
Oil markets content to consolidate gains.
The range-trading continued in oil markets overnight, with both Brent crude and WTI content to consolidate price gains near to the top of their recent ranges. A neutral day for the US Dollar saw buyers creep back in, pushing prices slightly higher overnight. High LNG prices in Asia are also benefiting oil prices indirectly.
Brent crude rose 0.80% to $56.45 a barrel overnight, slipping to $56.25 a barrel in Asia. WTI rose a more impressive 1.60% to $53.65 a barrel, before edging lower to $53.55 a barrel in Asia today. With the Biden package offset by weak US employment data, markets in Asia are disinclined to force prices one way or the other this morning. They will leave it to North America to decide if a retest of the recent highs is justified into the end of the week.
Both RSI’s for Brent crude and WTI remain in overbought territory, suggesting that further downward pressure could persist. Any retreat lower will be due to a readjustment of positioning though and should not portend a structural change in oils outlook—Brent crude’s recent high at $57.50 a barrel, and WTI’s at $53.90 a barrel, need to break to set oil up for further rallies into the end of the week.
Gold treads water in Asia.
A lack of movement in US yields overnight granted gold yet another reprieve despite some substantial intra-day volatility. Gold ranged between $1829.50 and $1857.00 an ounce but finished the session unchanged at $1846.00 an ounce. Some weekend risk hedging is apparent in Asia, with gold climbing 0.25% to $1851.00 an ounce.
Gold avoided closing below its 200-DMA at $1841.00 an ounce overnight. But if it closes below there tonight, it would be a bearish technical signal. The overnight low at $1829,50 an ounce and Monday’s low at $1817.00 an ounce are the next support levels. Failure of $1817.00 an ounce opens a retest of the psychological $1800.00 an ounce level. Gold’s long-term critical support is the 61.80% Fibonacci at $1760.00 an ounce. Resistance lies at $1857.00 and $1865.00 an ounce, followed by the 100-DMA at $1890.00 an ounce.
Gold appears set for another range trading session, awaiting the next move in US yields and the US Dollar.
This commentary is kindly contributed by Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA