British Elections, The Fed, and Donald Pump...Oh My!
As we head towards the Christmas Holiday period, and through the New Year when market liquidity tends to be low, this past week was perhaps the most event risk and market moving we will see until next year. But just you wait. Monday may see some fireworks…more on this later.
In this blog post we will look at the three major events of the past week: the British Elections, The FOMC Rate Decision, and the US-China trade war “phase 1” deal.
Brexit has been the big headline this year. We have seen the British Pound make volatile moves. You must feel sorry for the exporters and importers in Britain. They really cannot estimate profits and costs for the future as the currency fluctuates very rapidly. They must be thinking seriously about moving to Frankfurt in some instances. Brexit and the uncertainty it brings is what is weighing on the minds of GBP traders/speculators. A resolution, and quickly, is required to bring some stability back to the British Pound.
Of course, I have written about why I believe Brexit will likely not happen, or if it does, it will happen in a very painful way.
First of all, many British politicians who are in the European Parliament in Brussels will lose out on their 6 figure salaries and pensions. Secondly, the European elites know there will likely be another European debt crisis. The German taxpayer on their own will not be able to bail out Europe by themselves. The British taxpayer will also be required. And finally, and perhaps the most important: Brexit would set a precedent for other European nations looking to leave Europe (Greece, Portugal, Spain, Italy, Ireland). These nations would be inspired by what they see, a united Britain coming to terms to leave the Euro zone. This means that the European elites want to make the process arduous and as difficult as possible, even to the extent that Britain and British citizens be punished afterwards, just to discourage other countries from initiating an ‘exit’ process.
These elections were very important as the Conservative government wanted a majority to ensure they could pass their Brexit bill. We saw previous Prime Minister Theresa May attempt snap elections to try to get a majority in Parliament…but that failed. Prime Minister Boris Johnson decided to give it a go. His gamble paid off, as his Conservative party won a majority, while beating the Labour led by Jeremy Corbyn quite comfortably, and the Labour party losing many seats at the expense of the Conservatives. A disastrous showing for them.
This was the largest majority the Conservative have secured since 1987, when Margaret Thatcher was Prime Minister.
So what next as the Brexit drama continues?
With a Conservative majority, Britain finally has a path to leave the European Union. The majority allows Boris Johnson to pass through his Brexit deal which would see Britian leaving by January 31st 2020.
The Federal Reserve was what primarily took my attention. Fed Futures were showing a 97% chance of the Fed doing nothing. And do nothing they did.
This was the most dull FOMC meeting and press conference I have so far had the privilege of listening to.
What did the market get out of it? That the Federal Reserve will NOT be HIKING/RAISING rates in 2020. Inflation and more inflation is what would have to be seen for rate hikes. Recession fears have cooled off, and the Fed can remain in a wait and see approach. Again, inflation is the key to whether the Fed will cut or raise rates…and the geopolitical tensions, especially with China, factors a lot towards economic conditions that may warrant a rate cut. The Fed is on pause.
First of all, I did find it funny that many people even considered the Fed raising rates. We are well into a cheap money trap. Because of the debt the US government has accrued, as well as consumers, the Fed cannot hike rates as it would make servicing this debt even on the government side very difficult. The Europeans and Japanese, who are at negative rates, cannot even go up to 0.5-1.0% because the government would not be able to pay the interest on the debt. We see that worldwide debt levels are the highest they have ever been at 250 Trillion, and will only increase. US government debt is also increasing with no signs of slowing down. More money needs to be borrowed from the future just to sustain where we are today.
Not to mention the factors I mentioned in my previous article about the US Dollar. The Fed wants a weaker Dollar to help with the emerging market Dollar denominated debt. While other nations are cutting rates, the Fed will not hike rates.
At the time of writing, Fed Futures are pricing in another Fed rate cut around Fall of 2020. Of course this can change with data. Employment data comes good, but do not let that fool you, the Labour Force Participation Rate still remains in a range with not much improvement since the Great Financial Crisis even though we are supposed to be well into the recovery:
And finally the shenanigans with the US-China trade war. Oh boy.
So with the US to implement new tariff increases on China on December 15th, many were worried no progress on this “phase 1” deal was actually being made.
Then this happened:
In my 7 years of following markets, I have never seen a US President or any politician for that matter, pump up the markets as this President. Many now giving the President the title “Donald Pump”.
US markets hit record all time new highs as hopes for a deal strengthened.
I have given my opinion on this matter. China would come to the table if their food issue becomes worse (Pork prices have risen 110% in China), and/or China has a credit problem…we have been seeing some bank failures and bailout recently.
Of course, China can get foodstuffs from other nations. Brazil and Russia coming to mind. In terms of the credit problem, China still has room to cut rates and play with funny money policy (rates at 4.15%). It would really depend on China and their US Dollar reserves. Kyle Bass claiming China needs Dollars, and this is the weapon the US can use to dictate terms in a position of strength.
Then Friday came, and the Chinese claimed the text of the deal has been agreed upon, and the US will reduce and remove tariffs. Reading the deal it does seem the US has capitulated. US companies manufacturing in China can remain there (while the President has been promising bringing back US manufacturing jobs), and all China has agreed upon is to buy 50 Billion Dollars worth of US agriculture. To be completely honest, any US President would be able to make the Chinese buy more foodstuffs.
There seems to be no re-enforcing mechanisms, the Chinese being infamous for reneging on deals and promises, and larger issues such as technology and currency manipulation and trade still remain to be solved.
This is seen more as a truce or ceasefire before the US elections.
Herein lies the issue. The Chinese can remain patient to await for a weaker US President to come to office from the Democrat side in order to negotiate a better deal where China comes out on top. The Chinese also know the President is obsessed with the higher stock markets, and the markets being higher are crucial to his re-election. The Chinese know that if stock markets do begin to fall, the President will be to one who wants a deal, and it will be a Chinese dictated deal.
It would be a gamble for the Chinese because no Democratic candidate seems likely to beat President Trump. It would require a stock market fall and even bad jobs data for President Trump’s Democratic opponent to point and say “see he is not keeping America great as he claims”.
On the Chinese side they are saying that President Xi cannot compromise. He must have a deal that shows a Chinese victory. I have said this too. This really is a Thucydides Trap, and one side will come out victories while the other will be defeated.
Here is a chart of the Dow Jones at all time highs. The President has promised Dow 30,000 and I believe him. We will see it.
The President likely wants this truce in order to focus on the elections and then afterwards, he will be able to take a hard stance on China. He is pumping the markets, but I believe he is already getting help from the Fed.
The President wants low interest rates because it means that money MUST go into the stock market for yield. It forces money into the market. He does not need to pump them and can once again, he can be more hard on China without needing to worry about markets falling too much as the dips would be bought up due to the macro yield hunting/starving environment.
Sunday will be a very entertaining market open for futures. Let us see what China says, and if any type of agreement is signed. We may very well see a Black Monday regardless of the outcome. If there is no deal, and things are pushed off, the market may very well react negatively. Or if more details of the deal become more clear, the market may react negatively on what it sees.
The old buy the rumour sell the news wall street expression.
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