US Presidential debate farce, Compass points way to more lockdown worries

Morning Note

Staying up for the first Presidential debate would hardly have been worth it. Unedifying is the best word to describe. Biden held his own and the president missed his chance, mainly by talking over his rival at any opportunity; he did not allow Biden enough rope to hang himself.

Race featured prominently, but Trump only played to his base. This was the disruptive, abrasive Twitter Trump. We await to see whether the spectacle has had any impact on the up to one in ten voters yet to make up their minds. As grandpa Wilson would have said, I hae ma doots.

And as I keep saying, what matters in the US Presidential Election will be turnout in key battleground states and for this Trump needs it to be as rancorous as possible to energise his base. There is talk Biden won’t want to do more debates – that would be a mistake and make him look worse than he does after a relatively successful outing for the Democrat nominee, given the low expectations.

Equities down – will rebalancing give Wall Street a lift?

Stock markets fell yesterday, with European bourses down but off the lows. The FTSE 100 ended under 5,900. The S&P 500 butted its head against the 50-day moving average and came off to finish at 3,335.

US futures indicated further losses for Wall Street after the debate concluded. Asian markets were mixed. European stocks were mixed at the open but turned green after a weak start and the FTSE 100 rose above 5,900 with a weaker pound helping.

Month- and quarter-end rebalancing flows may make for volatility today. With US stock markets enduring a tough month there could be some reallocation back into equities that lifts Wall Street later.

Treasury yields ticked lower with bonds finding some bid, with the 10-year benchmark yield to 0.64%, its weakest since the start of September. I think last night gave the market a taste of the kind of election jitters to expect – the only thing the market wants is to get this election out of the way and draw a line under the whole charade.

Having kicked on from the 100-day line, gold firmed as TIPS moved more into negative territory but failed to clear $1,900.

Dollar slips lower, ADP in focus ahead of Friday’s NFP

The response in FX to the debate was a bit ‘meh’, but the dollar continued to ease back off the highs struck late last week and early this week, with DXY moving under 94, with bears eyeing the support at 93.70.

Later today is the ADP nonfarm report, which comes two days before the final NFP report ahead of the election. GBPUSD declined in early trade to test the 1.28 round number but the pair remains very much in its range of 1.27-30 that has bounded the price action for the last 3 weeks.

Britain’s economy contracted the most on record in the second quarter, albeit the 19.8% drop in GDP was less than the previously estimated 20.4%. Whilst this is backwards looking, just how optimistic can we be about the near future?

Compass Group uncertain about the future

Rising cases here threaten to mean further restrictions on our liberty that will act to further depress economic activity and consumer sentiment. Meanwhile unemployment will undoubtedly rise, harming the consumer sector even further.

Compass Group’s pre-close update contained some worrying signals for investors about this very problem, with management warning that the pace at which revenues and margins will recover remains unclear, especially given the possible increase in lockdown measures in the Northern Hemisphere through the winter months.

Group revenues fell about 19%, with Europe –25%, North America –19% and the Rest of World –9%. Sports and Leisure businesses in Europe and North America remain closed, but there has good recovery in Education and Healthcare.  Shares fell 4%.

Lockdowns and expected disruption to arrangements mean airline shareholders need to keep a close eye on forward booking trends. Flight searchers are down anything from 60-80% from a year before, according to Kayak. The chart below shows demand for the UK over the course of the year. The figures for the rest of Europe are comparable.

Talk of negative interest rates has been doing the rounds a lot on Threadneedle Street of late. But the Bank of England would be well advised to consider a Federal Reserve study that says the European Central Bank (ECB) made a big error when it opted for negative rates.

As repeatedly stressed in these columns, negative rates represent a monetary policy black hole from which it is very hard to escape and it harms banks, eroding their profits and capital ratios over time.

The study from the San Francisco Fed notes that “banks expand lending only temporarily under negative rates” and “as negative rates persist, they drag on bank profitability even more”.

It concludes: “While lending initially increases under negative rates, our analysis implies that gains are more than reversed as negative rates persist. Overall, our results suggest that caution is warranted when considering negative monetary policy rates to encourage additional bank lending. Under extended negative rate episodes, evidence shows that both bank profitability and bank lending activity decline. This calls into question one of the primary motivations for negative policy rates.”

Chart: Negative rates are meant to increase loan growth, not depress it

Elsewhere in commodities, oil was softer as the API weekly inventory data showed a small draw on crude stocks while there was a build in gasoline inventories. As noted yesterday, traders should be wary of global onshore inventories flipping from draws to builds

The American Petroleum Institute recorded a draw of 831k on oil inventories whilst gasoline inventories rose 1.6m vs expectations for a draw of 1.3m. Oil stocks at Cushing, Oklahoma rose by 1.61m. As data points to a slowdown in the velocity of people, demand for oil is already rolling over and stocks may well start to build without China hoovering up the excess.

EIA data on tap later today will provide further guidance for markets. WTI (Nov) retreated to a two-week low at $38.42 but recovered $39, which is forming the near-term support. September lows at $36 are in focus.

US Presidential Election: Not Red, Not Blue, but Green to win?

US Presidential Election

With a recent poll showing that 14% of registered voters see climate change as the most important challenge facing the country, victory in November may well hinge on the success or failure of the respective parties to own this issue. For context, such a figure implies that around 30 million voters could cast their ballots this Autumn with the environment at the forefront of their thinking – that’s two to three times as many as in 2016.

Of those who care about climate change, one-third describe themselves as ‘very progressive’, suggesting that it is the Democrats who have the most to gain from grasping the initiative on the environment.

Voters focus on green policies, but does Biden?

Despite this potential vote-grabber for Biden, the issue features only 25th on a list of policy proposals on the Biden 2020 website. His plan has three main avenues of execution:

  • Reinstating Obama-era regulation through executive order
  • Investing $1.7 trillion in green energy and jobs through an act of Congress
  • Leading international treatymaking efforts on the world stage.

That’s a long way from the $16 trillion investment into the “Green New Deal” that Bernie Sanders was promising. Herein lies the dilemma which will ultimately decide Democratic fortunes this year – how can they appeal to the middle whilst also ensuring that their base turns up to vote? It looks like climate change isn’t a hill for them to die on.

Rebranding climate issues for rust belt voters

The electoral system also explains why the climate features so far down Biden’s list. The rust belt is a crucial cluster of states for both parties when it comes to grabbing electoral college votes, and many of these rely heavily on so-called ‘dirty industries’ for employment and prosperity. Pennsylvania is the main example of this, where Trump secured victory by less than 45,000 votes in 2016. As the third largest coal-exporting state in America, voters in this area may not react well to Biden’s green vision, allowing Trump to take home 20 crucial electoral college votes.

There is however an opportunity to re-brand green credentials as a wider vote winner. The climate issue is ripe for conversion into an anti-China policy, thanks to their role as global polluters in chief. With approval of China down to -40% in the wake of coronavirus, and Trump likely to leverage this sentiment in his own favour, the environment offers the Democrats a line of attack which can be employed without turning off their core base of support.

How will America’s Climate Policy shift after the US Presidential Election?

There are three main scenarios that could play out in the US Presidential Election.

Scenario One: Trump Wins a Second Term

With or without a Republican Congress, Pres Trump would likely continue to use executive orders to cut back the environmental regulations that were instituted by the Obama administration. So far, Trump’s repeals have included the moratorium on federal coal leasing and the extent to which federal agencies must take account of the environmental impact of their actions.  

  • This would benefit fossil fuel companies

Scenario Two: Biden beats Trump, and the Democrats gain Congress

In this instance, the Democrats would have carte blanche to deliver on all of Biden’s campaign pledges, including the $1.7 trillion of government spending. In the wake of coronavirus, huge government investment will be expected, providing the perfect cover for such a policy. However, with a majority only guaranteed for two years, and other objectives clearly taking priority, it is unclear whether a Pres Biden would deliver the entirety of his environmental agenda, even in the greenest of scenarios.

  • This would benefit companies that can boost their green credentials
  • It would harm “dirty energy” businesses

Scenario Three: Biden beats Trump, but the Democrats fail to capture the Congress

Here, Biden would have to rely on the power of executive orders and the office of the Presidency to implement parts of his climate proposal. As easily as Trump repealed them, Biden could reinstate Obama’s regulations. Also, he could use America’s status on the world stage to influence treatymaking and catalyse future climate accords. However, the $1.7 trillion investment in green energy and jobs is not possible without congressional approval, leaving the former VP with a half-delivered promise.

  • This would be like half a heart transplant: the economic damage of regulation would be incurred, but without investment elsewhere to compensate

Despite any green rhetoric, the truth is that the environment simply isn’t a priority for the Biden campaign, and this is unlikely to change once in office. A New Deal might be in the offing to respond to the huge economic downturn, but it’s unlikely to be a very Green one.

How will the US-China relationship define the Presidential election?

US Presidential Election

Trump knows that antagonising China is a dangerous game. But in the run up to the election, it’s also a political necessity.

Before the coronacrisis, there was already a perfect storm of economic and security disputes brewing between the US and China. Covid-19 compounded all the existing issues as well as adding a whole new dimension to the rift. Tension is escalating on all fronts.

Economic

Phase one of the trade deal is dead. The promises made by China – purchasing at least $200 billion in US exports over two years – looked unrealistic from the get-go. But the virus means meeting phase one’s targets will be downright impossible. Throw in that China is already buying more from competitors (its imports from Brazil are up 35% on May 2019) even in an economic downturn, and any revival of the Trade Deal before the Election look dead and buried.

Security

The tech war has entered a period of unprecedented turbulence. Trump continues to affirm that Huawei threatens national security, upping the ante in May when a new rule was issued barring Huawei and its suppliers from using American technology.

Foreign policy

The Trump administration is reportedly exploring several measures that could punish China for its handling of the virus, including suing the Chinese government for reparations and cancelling US debt obligations to the country. Meanwhile, China has ordered its state-owned enterprises to stop purchases of US farm products after the US threatened to withdraw its special status treatment for Hong Kong – itself a response to China’s new security law for the territory.

The President was aiming to run his campaign based around strong economic performance, and failing that, a successful response to the pandemic. As both these options become increasingly difficult to achieve, China must serve as the scapegoat on which Trump can pin his administration’s failings.

Usefully for Trump, the American people aren’t too fond of the Chinese right now either. A Pew Research Center poll from April suggests that Americans have increasingly negative views of the country with two-thirds now holding an unfavourable opinion towards China.

This sentiment is widespread across a range of groups in America, which is unusual in an ever more polarised electorate.

A Republican ad campaign has been launched proclaiming, “One nation deserves the blame: China”, while the America First Action SuperPAC says it’s spending around $10 million on ads in swing states condemning Biden over China.

It’s rare for two thirds of Americans to reach such a strong consensus so inevitably both the incumbent and his challenger are attempting to burnish their anti-China stripes.

Each also believes they can use China to score personal points against the other candidate.

  • Trump is quick to criticise “Beijing Biden” and his son’s alleged profiteering from Chinese business.
  • A recent Biden campaign ad reads, “Trump rolled over for the Chinese. He took their word for it.”, and goes on to cite some of Trump’s early remarks praising China’s pandemic response.

This fight isn’t without its risks however.

  • In May, Biden’s aforementioned ad sparked outcry from representatives of Asian American Organizations who accused the Democratic candidate of feeding the rise of anti-Asian racism in the US.
  • For Trump, a new economic cold war would imperil any incipient return to growth not to mention leave it isolated when big global discussions take place. Hence the recent decision by the US Commerce Department to allow American companies to collaborate with Huawei on 5G technology standards.

As we know though, Trump is no stranger to risky political moves. With winning the election his top priority and alternatives running out, the President will hold onto the anti-China card for dear life to avoid being trumped by Biden.

The battle of ‘who’s tougher on China’ shows no signs of relenting. Both candidates will be forced to push harder and harder to have the last word on an issue which has galvanised such a strong reaction among the American public.

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