Unhappy Monday
A further end-of-week drop in US stocks sets a poor tone to the start of the week in Asia. German politics adds to concern over the direction of Europe's leading economy, but signs of a mechanism to get Iranian oil back on the market could help keep local interest rates down.
Circumventing the dollar
A story that has got very little press, probably because it is happening behind closed doors, has received another breath of publicity today. Bloomberg reports that the EU is close to finalizing a deal that will allow Iranian exporters to sell their oil abroad, and buyers to bypass US sanctions. Exactly how this will work, we can't say. Conjecture is of a special purpose vehicle acting as a go-between and potentially using a system akin to barter to avoid settlement in US dollars. But more this we can't say.
What is worth pointing out is that before it began to top out, the primary driver for oil's recent rise was the loss of Iranian crude in the market (see also this from Warren Patterson), coupled with logistical bottlenecks for US shale. Adding back in the 400,000 barrels a day of Iranian crude that has been lost since June this year could see the Brent crude benchmark stabilize at or below $75/bbl. and in line with ING forecasts.
Whilst that is at the higher end of what I think consumers would like, in my view, it takes oil back into the global "sweet spot" where both consumers and producers are doing OK ($65-$75/bbl) - though in reality, both moaning equally (that's just human nature). In particular, this should help those Asian economies with a combination of energy price related current account difficulties, and inflation issues. Amongst others, IDR, INR and PHP stand to benefit.
As an aside, could this be an important crack developing in the USD's reserve currency status? That's a thorny issue and liable to get the sort of angry reaction that stems from writing about BitCoin, or gold prices. So I will just leave that thought dangling...anyone?
EUR/USD lacking direction
News over the weekend does not seem to have left any clear direction for EUR/USD and consequently, leaves Asian FX somewhat directionless at the beginning of the week (with the exception of the CNY and Asian basket peggers, the equity backdrop seems to be having little effect on Asian FX).
Germany's political fragmentation continued over the weekend in the state of Hesse. And while we may have wondered about the long-term future of the USD as a reserve currency, I'm having difficulty imagining a Europe without the firm leadership of Angela Merkel at its centre. This has ramifications on subjects as diverse as the form of Brexit eventually that emerges, to the possibility of future European reform.
On the plus side, there does seem to be some slight movement on the Italian budget, though probably too little for the EU Commission. But every journey starts with a single step. The net result is EUR/USD still hovering just below 1.14.
G-20 - will they won't they
As of today, President Xi and President Trump are scheduled to meet at the G-20 to discuss trade, this according to Larry Kudlow. This has been on and off for weeks now. But Kudlow also added that he didn't expect anything meaningful to come of the talks. I don't either. I'm also not sure that it is meaningful that they are even talking. From the US perspective, until China is prepared to talk about intellectual property transfers from joint ventures, there is little to discuss. And from China's perspective, until they have a firmer idea of what the US actually wants. there is not much point in starting talks.
Asia week ahead
There will be a lot of focus on China data this week. September Industrial profits numbers released over the weekend were poor - showing a rise of only 4.1%YoY, and down from 9.2% in August. This week, we have official PMIs together with the Caixin PMI. The consensus is guessing no further move taking the index through the boom/bust 50 level it reached last month. On the back of the profits figures, this seems optimistic, and our Greater China Economist, Iris Pang, expects the level to be broken, with the Caixin PMI falling to 49.5.
Data out of the US this week in advance of Friday's jobs report will have to do the talking as the US Federal Reserve is in the blackout period ahead of the 9 November rate meeting. Markets are beginning to doubt the 2019 hiking story again given the equity backdrop. But I don't think the Fed is ready to change course yet,
And from Prakash Sakpal: The Pakatan Harapan coalition government is due to unveil the 2019 Federal Budget this week (2 November). Significant policy changes such as the elimination of Goods and Services Tax have derailed a decade-long fiscal consolidation. We expect this to push the fiscal deficit above 3% of GDP in 2018 and keep it there in the coming years. Yet, with the expectation of continued monetary policy accommodation for a prolonged period, the macro policy mix still remains healthy.
Download
Download opinion
28 October 2018
Good MornING Asia - 29 October 2018 This bundle contains 5 Articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).