Rabobank: “Bombshells Loom”

By Michael Every of Rabobank

Bank Holiday Bombshells

Happy Monday – or for me traditionally an unhappy Monday. Growing up in the UK, this particular Bank Holiday Monday (for a holiday in the UK it is) was a shock to the system. First, the weather always, always sucked – and surprise! It’s cold and rainy again today. Moreover, psychologically it was a day where it was still August and the shops were trying to sell us damp ice cream and tales of summer and sunshine…and yet 24 hours later you knew it was going to be September: autumn; back to school; the media talking about the clocks changing; dark; cold; no more bank holidays for the year, and no day off until Christmas. In short, you were always trying to enjoy the Bank Holiday, but with a sense of foreboding as you knew that a psychological and physical bombshell was looming.

Which seems an apt metaphor for today. Once again, markets are rising. Once again, it’s all sunshine in terms of market commentary. And yet 1 September looms.

First of all, back to school, then. Let’s see how that challenge is overcome in the age of Covid-19.

Second, we have stories in the UK that the Treasury is considering massive tax hikes to try to deal with the existing Covid-19 debt build-up (let alone what happens if re-opening schools goes wrong.) Regardless of the political-economy of tax hikes and reallocation, which I addressed last week, any step up in taxation means a smaller fiscal deficit – and that means less state stimulus – and that is at a time when the recovery is far from cemented against either the downturn or the virus. Apparently, No. 10 is not on board with tax hikes. They want to consider spending cuts instead, which are arguably even stupider given their political-economy.

So what’s the simple message? The UK has not worked out how to safely reopen the economy, including schools, and has even suddenly flagged shut downs can be seen again if things go wrong; and the UK has not worked out that everything has changed, fiscally and politically, when it clearly has. Imagine if we get austerity and a virus flare-up. Imagine if we don’t and we don’t. That’s the difference between a Bank Holiday scorcher and the usual downpour.

This metaphor applies everywhere, even in places with far better weather.

Other bombshells loom, of course.

The US election campaign is moving into even higher gear, and as it does so we see further US sanctions on Chinese companies, with Bloomberg reporting the chip industry fears it is next. TikTok owner ByteDance has meanwhile said that it will comply with a new Chinese regulation that seems to imply that it cannot be sold without Beijing’s say so: does this slow things down, or does it mean the value of this asset is not in the tens of billions mentioned recently, but perhaps zero? If so, this would very powerfully illustrate the point about how private companies can get swept away by the changing political economy, something that was again being flagged last week.

On the political side, a Democracy Institute/Sunday Express Poll also now puts Trump 3 points up on Biden nationally (48% – 45% with 7% undecided) and up 7 in key swing states (49% – 42%), with a Trafalgar poll on Friday putting Trump up 2 in Michigan (47% – 45%). Saying anything about the US election now generates a hyper, hyper-partisan response, but can we agree the outcome in November still remains open rather than being a done deal?

Meanwhile, over the weekend Greek and Turkish F-16s were involved in not-so-mock mock dogfights. Clearly, tensions in the East Mediterranean remain high. Indeed, Turkey’s Foreign Minister has now cited a 1995 Turkish Parliamentary resolution to declare that if Greece extends its territorial waters to 12 miles in the Aegean (consistent with the UN Law of the Sea) it would be a casus belli – and Greece has stated it intends to do so. The EU is also threatening sanctions against Turkey over its energy drilling. Escalation on all fronts, in other words, and no clear path to a compromise that does not also compromise the UN Law of the Sea (again).

China has also slapped another investigation on Aussie wine exports that could last until 2022, just in case they didn’t notice the first one. Fortunately, they are still snuffling up as much iron ore as is possible, because that ol’ pump-primin’ just keeps a pumpin’…regardless of the inefficiency of the investment and how this all plays out in the long run.

Frankly, it is tiring to keep repeating that the real world, where people still live, and markets, where people don’t, are related to each other like a dream UK August Bank Holiday and the actual outcome. Such is life, however.

Indeed, in terms of data, the Asia-Pacific outlook overall showed more showers than sun:

• Japanese industrial production today was up 8% m/m vs. 5% expected, so some ice cream due there for once…until one sees it is still -16.1% y/y, and that retail sales slumped 3.3% m/m vs -2.5% expected and are down 2.8% y/y;
• NZ business confidence was flat at -41.8, showing no recovery at all;
• China also reported that its August manufacturing PMI at 51 vs. 51.2 consensus, but with services at 55.2 vs. 54.2 expected (which is odd given all other indicators show the production side of the economy is close to normal, but the consumption side isn’t….so which services are doing so well?); and
• Aussie private-sector credit was -0.1% m/m and now up just 2.4% y/y. This is not the stuff recoveries are made of.