Javblog

Javblog

Monday, September 19, 2016

It's all about policy this week...

A good piece from Standard Chartered this week chimes with our view on the USD and JPY...

What policy meetings this week mean for currencies

 Two key events this week, namely the Fed and BoJ policy meetings, could significantly impact currencies. 

Markets are positioned for the BoJ to come out with additional easing measures, while not much seems to be expected from the Fed. We believe a disappointment could result in JPY gains, as has largely been the case this year. Additional easing could limit JPY gains, but anything short of a major surprise is unlikely to significantly weaken the JPY. (Javelin's view - The BoJ has a long line of recent form in disappointing market expectations of easing. Although at some point these expectations will be met - and how can they not be with the strength of the yen throttling the manufacturing sector? - the risks must be that they will once again come in with a disappointing handful of zilch).

We expect the Fed to maintain interest rates, but leaving the door open to a 2016 rate hike should data improve. The USD is likely to continue its range-bound movement in this scenario. Any hawkish comments, on the other hand, could result in short term USD gains (Javelin's view - It seems unlikely that the Fed will act so close to the election and one which looks as though it will go down to the wire).

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 6
5577186
Find us on Facebook: http://www.facebook.com/JavelinWealth
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.

Thursday, September 8, 2016

Hillary Or Donald?

The lesson from the pre-Brexit opinion polls was that these are fallible and not the cast iron predictor of outcomes that we had assumed. 

On that basis,  the current predictions of a reasonably comfortable Hillary victory in the US presidential election on November 8th should be taken with a pinch of salt, even if these predictions are backed up by stats guru Nate Silver (who has predicted the outcome of the last 3 US elections with sharp accuracy). See http://projects.fivethirtyeight.com/2016-election-forecast/ for more. 

Hillary's lead has shrunk somewhat since the Democratic convention in July, and a number of polls now show a tight race that seemingly could go either way. Whilst you could argue that the Democrats benefit this time from the structuring of the electoral college vote, and from the fact that Donald Trump has repeatedly alienated whole rafts of the voting population (women, non-whites, college grads, California....), it's nonetheless sensible to have a think about what would be the ramifications for the markets of a Trump upset.

Both Trump and Clinton have talked up their protectionist and anti free trade credentials in recent months, although Trump has been the most outspoken as regards his contempt for NAFTA and the TPP, backed up by his "commitment" to build that wall on the US/Mexico border. Clinton's stance has hardened somewhat too as the popularity of Trump's anti-immigrant position has become apparent. The fact that opposition to free trade is in direct contravention of decades of Republican Party policy is just one of many sacred cows that have been slaughtered in this bizarre election season. 

One might hope that the practicalities of governing and the need for congressional approval will temper rhetoric with reality, but nonetheless the immediate reaction from markets will be one of nervousness about a potential trade war, with the implications of tit for tat actions on a global basis. As everyone seeks to win, no-one does. The imposition of the Smoot Hawley trade tariffs in the 1930's (the last time the US retreated behind its own borders) were a direct trigger for the deepening of the Depression. We hope that we are not looking at a repeat of that painful lesson.

In that environment, the actions of central bankers will remain centre stage. Trump has made no secret of his desire to curtail the independence of the Fed, and that would likely mean building pressure to replace the current Chair, Janet Yellen, with someone more in line with his thinking when her current term ends in February 2018. We have seen no details as to what a new policy would look like, but, again, the lack of detail creates the very uncertainty that markets dislike. One assumes that the knee jerk reaction would be for a weaker USD, and possibly a rise in the gold price.

No presidential election candidate ever made a virtue from having sums in an economic plan that add up. 

The promises of increased spending for special interest groups are never matched by corresponding increases in tax. Usually the commitment is for the complete opposite - tax cuts. These are exactly what have been promised by Trump, together with significant increases in spending on infrastructure and the military. Again: the realities of governing will constrain much of what can be done here, but we'd assume that a wholesale rollback of Obamacare would be one way of cutting some elements of entitlement spending. Not so good for the healthcare and pharma sectors, although the defence and infrastructure industries would presumably be happy. 

We also assume that the level of debt issuance by the US government will rise as big spending meets cuts on tax revenue. 

At present, in the face of globally low interest rates, governments can seemingly issue as much debt as they like without markets taking fright. If that changes, and the perceptions of risk rise in line with a ballooning debt to GDP ratio (in the US this currently stands at 104% or $19.4 trillion - with a 'T'), then interest rates will go up as investors demand a higher return to compensate for the higher risk. 

Trump has previously shown a fairly cavalier approach with regards to discussing sovereign debt default (perhaps understandable for someone whose businesses have gone bust at least 4 times), and this approach would result in an increased degree of volatility in both debt and equity markets. Bond yields would likely rise (they are currently at all-time lows), since bond prices would fall in expectation of a sharp increase in supply.

Of course, much of this could be mitigated by Trump as President-Elect appointing a team of sensible, sober, reasoned individuals to run and craft his economic platform. Unfortunately, the fact that many of the Republicans who might fit that description have either chosen to sit this election cycle out or to actively endorse Hillary, does not bode well. Neither does Trump's style of seemingly making up policy on the hoof: we could be in for an extended period of economic policy making by megaphone.

Should Trump be defeated by Hillary, then the immediate reaction of markets would be, we think, one of relief, if only because that implies a continuation of the status quo, at least in the short term. The Fed's independence would be left in place, and markets would be comforted by a degree of predictability. 

Under Clinton, who over many years has shown herself to be an incremntalist, longer term, some of the existing free trade deals might be re-crafted to make them more domestically palatable. "Club deal" multi country packages (such as the TPP and the TTIP) might be abandoned in favour of more bilateral deals between the US and individual countries (a recent global theme, in the face of the apparent collapse of global trade talks under the auspices of the WTO). These would take longer to push through, particularly in the event that control of Congress remained split post November.

All in all, in the run-up to the US election, we can expect that markets will gradually focus more on politics and polls (it was the same in the run up to the Brexit vote and the Scottish referendum).

Markets don't care until they do. 

At present, they are relatively sanguine, and seemingly expecting a reasonably comfortable Clinton victory. However, this could soon look overly complacent. The lack of detail from the Trump camp will be viewed with increasing concern should the likelihood of a Trump victory begin to rise over the next 8 weeks.

Steve
e-mail: steve.davies@javelinwealth.com
contact:  +65 6
5577186
Find us on Facebook: http://www.facebook.com/JavelinWealth
Javelin Wealth Management supports the global microfinance philanthropy initiative www.kiva.org, the education charity, www.roomtoread.org, and the Singapore Children's Cancer Foundation, www.ccf.org.sg. New clients to the firm can nominate any or all of these charities for a donation we make on their behalf.