The seeds of fiscal stimulus | Daily Market Commentary with Jeffrey Halley
Long-time readers will know, that I have argued that global central banks are reaching the limits monetary policy stimulus. Looking around the developed world, only the United States has achieved anything like a post-GFC normalisation of interest rates. Meanwhile, the developing world, with their pseudo-dollar-linked exchange rate policies and export-driven economic models, catch pneumonia every time the U.S. gets man-flu.
With the notable exception of China, who has never been afraid to use government muscle to offset potential slowdowns, governments of the rest of the world since the GFC, have been content to outsource this job to their central banks in the form of monetary policy. Cutting interest rates and quantitative easing to those of us of the great unwashed. Fiscal stimulus (government spending), being a dirty word in the age of supposed government financial prudence, politicians put it in the too-hard box and took the easy route of letting central banks do the heavy lifting.
With interest rates at mostly post-GFC lows and global growth slowing through a combination of well-documented factors, something needed to change. A quick look at the negative interest rate mess Europe and Japan are in highlights that. Change though may well be on the horizon. Thailand posted its worst GDP numbers in five years yesterday but announced a $10 billion stimulus package. Germany surprised markets overnight by suggesting EUR 50 billion might magically become available for the same, and none too soon. The two-day drive from Brisbane to Sydney reveals some serious cash being spent to build a lot of roads.
U.S. Treasuries sold off overnight as the U.S. Treasury sounded out the appetite on the street for 50 and 100-year bonds. The long-forgotten trillion-dollar Trump infra-structure project would mate nicely ultra-long dated U.S. bonds. Anyone would think 2020 was a U.S. election year. Watch this space.
Equity markets rallied overnight as China introduced a new prime rate that will lower the cost of corporate borrowing, while Germany talked more government spending, and Huawei got a 90-day reprieve. The markets also gee-ed themselves up for a super-dovish Jackson Hole opening address by Jerome Powell later this week.
The last point is fraught with danger, however. With over 90% of U.S. quarterly results in, earnings have held up just fine, trade war or not. The FOMC committee did not unanimously agree to the last 0.25% cut by the Fed. U.S. economic data continues to perform blissfully, implying the economy is doing just fine, thank you. Against that backdrop, I struggle to see why Chairman Powell would hit the panic button at Jackson Hole this week. The financial markets could be setting themselves up for an ugly correction into the week’s end.
Asia has a very light data day with Taiwan export orders at 4 PM SGT the highlight. The street is picking a -5.90% drop, potentially highlighting the continuing spillover of the U.S.-China trade war.
The equity comeback continued full steam overnight with Asian, European and North American stock markets a sea of green. The S&P rose 1.20%, the Nasdaq 1.35% and the Dow Jones 0.95% as traders jumped on the Jackson Hole bandwagon.
My doubts on that aside, the feel-good sentiment should continue in Asia today with both the Nikkei and ASX higher in early trading. Only the President’s social media account could upset what should be another positive day for stocks.
Treasury yields continued rising overnight as the panic of last week continued to unwind. It broadly supported the U.S. dollar which continues to grind higher against its G-10 counterparts. In the absence of any other inputs, interest rate differentials alone will continue to support the greenback, one of my themes of 2019.
Regional currencies may ease gently against the dollar today following its overnight strength. That weakness, though, should be tempered by the continuing recovery of risk sentiment on the street.
Oil’s wild ride continued overnight, ostensibly on Saudi supply fears, but more likely driven by the return of risk sentiment to other markets, coupled with the possibility of more global stimulus measures. Brent crude rose 1.95% to $59.80 a barrel and WTI rose an impressive 2.50% to $56.35 a barrel.
The technical picture on both contracts shows plenty of room on the top-side available following last week’s aggressive correction. That should be tempered, however, by the release U.S. API Crude Stocks tomorrow morning. An unexpected rise, possibly taking the wind out of oil’s sails, if only temporarily.
The return of risk sentiment with such force has not treated gold well these last few days. Gold fell 17 dollars to $1496.00 an ounce overnight, as shorter-term traders continued to unwind safe-haven trades.
With the present risk-seeking environment prevalent, gold could remain on the back foot until Powell’s Jackson Hole opening address. I reiterate though; there is a real danger that Mr Powell does not give the uber-doves what they want. That could set up gold for quite a sharp end of week recovery.
Gold’s next technical support is at $1480.00 an ounce with $1500.00 an ounce providing short-term resistance.