The Impact of Disruptive Politics

Increasingly many experts, economists and pundits areblaming the root of the global slowdown at the front door of just one man- Donald Trump. Well, much as there’s a solid case for that argument, the truth is that the world was slowing down anyway. Trump merely exacerbated the situation in general and with China in particular. Naturally, many Americans would agree strongly with his quest to try andreduce the huge US trade imbalance. Indeed, I have sympathy with that too.

However, the simple truth is that the US, like the UK, is not an economy that can simply export it’s way out of trouble via a quick fix on the exchange rate. The growth and reliance on the service industry, at the expense of the manufacturingsector over the past 40 years has largely seen to that, but Trump does have a valid point, in particular on intellectualproperty theft. Furthermore, forget about fake news for one minute; what about fake goods? The Chinese are masters at copying anything, from a packet of fags to a $100 bill, a handbag or even a mobile phone.

However, Trump’s antagonistic and disruptive politicalapproach, with strongly worded rhetorical tweets has also played havoc with the usual forms of intercontinental diplomacy and in the process; scared many business and industry leaders into preparing for the worst. This is having a significantly negative impact on investment and trade, not just in China but in Asia and Europe too.

In respect of the Fed and their policy action of the past 2-3 years. Well, if anyone, including Trump thinks that negative interest rates are the answer, then I suggest they should think again. Just look at how that has played out in Japan over the past three decades and how a similar policy mistake is now impacting Europe. So, I think the Fed’s move to increase rates was entirely the right course of action- action that was also spurred by fiscal stimulus- take note Europe and Japan please!

The main irony of all this of course; is that in seeking to counter responsibility for a likely US slowdown, by condemning the Fed for keeping US interest rates too high and the dollar too strong, the US president is actually having a more negative impact on the very thing needed to avoid such an outcome- consumer sentiment. The same consumer that will ultimately decide his electoral chances next year- assuming he remains in office that long of course!

Data release wise, there’s a few things that could shift the dial this week. The most likely is probably the September US CPI inflation report, which is due out at 1.30pm on Thursday. There’s also a couple of speeches from the Fed boss (times as noted below) this week too which could set markets rolling. The other contenders for market moving releases are the minutes from the last Fed policy meeting at 7pm on Wednesday and the ECB equivalent at 12.30pm on Thursday. Oh and let’s not forget the UK August GDP print, out earlier that day at 9.30am.

However, beyond all of the above, there is some otherimportant data I do want to bring to your attention and that’s the latest foreign currency reserves data from the HKMA (Hong Kong Monetary Authority) That’s due out sometime on Tuesday. It will be interesting to see how much capital is still fleeing the region, by just how much those reserves have been reduced again in September (-$16 billion in August), as the HKMA continues to defend the upper band of the USDHKD peg at 7.85. However, as noted before, HKMA reserves at $432 billion are still vast.

The Triple D Endgame

As for the pound this week? Well, despite time running out all options are still open it seems, and clearly the 3 main outcome scenarios on the table are: - deal, delay or depart. The ‘Triple D endgame’ if you want to call it that?  Who knows that might yet even get whittled down to a “Double D” –a bit of an oxymoron that one! Anyway, so the potential on the GBPUSDremains for an explosive move below 1.20 to who knows where, or perhaps a less rapid one back above 1.30, or simplyas you were folks! We shall see. Meanwhile 1.22-1.24 pretty much covered it last week and may do so again until something more concrete appears- headline dependent as usual though and that clock is ticking again!

Beyond all that, and what we do know and what we don’t; the burning question on my mind this morning, is whether or not it’s possible to talk ourselves into recession? I suppose ultimately, the truthful answer to that; is yes as that’s exactlywhat makes for booms and busts- ‘irrational exuberance’ and irrational fear. If that’s the case, then is it possible that just onebooming voice can make all the difference?

Important Economic Releases/Events Due This Week

08/10- Hong Kong Foreign Currency Reserves (Release time Uncertain)

08/10- 11.00am US NFIB Small Business Optimism Index

08/10- 6.50pm US Fed Chief Powell Speech from Conference in Denver

09/10- 3.30pm US Fed Powell Speaks from Conference in Kansas City

09/10- 7.00pm US FOMC Releases Minutes from September 18th Policy Meeting

10/10- 9.30am UK August Industrial and Manufacturing output

10/10- 9.30am UK August GDP Revision

10/10- 12.30pm ECB Releases Minutes from September Policy Meeting

10/10- 1.30pm US September CPI Inflation Report

11/10- 1.30pm Canadian September Unemployment Report

11/10- 3.00pm US- University of Michigan October Consumer Sentiment Index