The much-derided euro is now the currency of choice following the announcement of an EU fiscal package which for the first time involves debt mutualisation and the promise of a unified rather than single country fiscal policy in the future. The previously all conquering US dollar, pre-eminent for a decade, is suffering from its loss of ‘carry’advantage following the huge fall in Treasury yields along with a more general sense that the US is losing its political and economic global leadership. Predictions of the greenback’s demise are premature, no other country matches the dynamism of corporate America and the unsurpassed scale and liquidity of the dollar bond market make it a ‘go to’ safe haven currency. Sterling had been making a bit of a comeback over the summer, especially against the dollar, but once Brexit entered stage right and sterling tanked, leaving it as the weakest major currency year to date.
On you go, Sleepy Joe
I’m your yankee doodle dandy in a gold Rolls Royce, I wanna be elected,
We’re all gonna rock to the rules that I make, I wanna be elected,
Any excuse to get a bit of glam rock in a newsletter I guess but the Alice Cooper aficionados amongst you will know that a later line is ‘we have problems in New York, St. Louis, Philadelphia, Los Angles, Detroit, Chicago, everybody has problems’ which rather sums up the state of the US right now as the presidential election becomes front and centre in the market’s attention. So too the elections to the Senate (currently with a Republican majority) and the House of Representatives (Democrat majority) which are key as a split Congress makes the passing of major legislation far harder. Current polling is very tight but a Democrat sweep of both houses which could pave the way for radical change in the institutions of government, most notably in producing a more liberal Supreme Court, particularly so with the controversy over the proposed new appointee staunch conservative Amy Coney Barret following the death of liberal icon Ruth Bader Ginsburg. What we do know is that the election will become increasingly bitter and toxic, as was evident from the first televised debate which was a national embarrassment and disgrace. A major concern is that the unique nature of a COVID election and its greatly increased reliance on ‘mail-in’ (postal) voting could lead to delays in the result being announced, and quite likely, even the questioning of the legitimacy of this result.
The key electoral issues will be the Trump administration’s handling of the COVID crisis, the economy and law and order. Trump’s approval ratings were at rock bottom in the summer but have picked up somewhat as the health numbers have improved and an economic recovery has gained some traction, though he still trails Biden by around 7% nationally and, critically, in the key ‘swing states’ in the Electoral College. The issue for markets is what a Biden Presidency will look like, especially if the Democrats sweep both houses of Congress. Corporate America would have more to worry about from a tax and regulatory standpoint, though this could be balanced in the eyes of the market by a less divisive domestic and more constructive international agenda. Government spending will rise and corporate taxes will be raised, though probably only from 21% to 28% and not phased in till 2022 as protecting the COVID economy remains the main priority. As discussed previously, Biden is also likely to be tougher on regulating the technology giants and to reduce healthcare costs for individuals. He is also very committed to cleaner ‘green’ energy policies whereas Trump is a climate change denier and a great supporter of the traditional US oil and gas industry. Biden and Harris are not Sanders and Warren, so expect gradual and progressive reform not a widescale, radical re-shaping of society and the economy. Think Sir Keir Starmer (our next PM?), not Jeremy Corbyn.
Oh no, not again
Brexit. I seem to have spent my whole career writing about it and now, amid the worst pandemic for a century and the great upheaval in our daily lives here I am, still having to write about it. The Government seems committed to the bare bones of a treaty that could feel like a No-Deal exit and the ‘Northern Ireland Question’ remains as insoluble as ever. Boris seems to regard international treaties as an inconvenience rather than binding in law and in doing so diminishes the centuries long reputation of the UK as a bastion of democracy and fair play. Good and honest people to do business with, in other words, something you think you’d wish to remain if you were just about to embark on negotiating trade deals on your tod with the rest of the world. International investors are voting with their feet leaving sterling a structurally weak currency and UK assets, in general, less desirable.