Everyone knows it is an unwritten rule of social etiquette that you never ever double-dip your nacho chip in a bowl of salsa/guacamole/hummus when at a public event. Anyone caught even attempting to carry out such an audacious and inconsiderate act is almost immediately ostracised and surely shunned at future events and gatherings. What do we make then of Obama’s declaration, in a very public forum, that the US is likely to suffer the indignation a double-dip of its own – was he simply covering for the worst or preparing for the inevitable?
Whatever the reason, and without looking too far into the “in-between-the-line” domestic political aspect of the declaration, the recent increase in US unemployment to 10.2% has certainly shocked the public and some policy-makers. Although we have argued that lagging indicators can often prove less useful than even simply anecdotal evidence when playing the markets, the psychological impact on the ongoing fiscal effort across the US political spectrum (National Debt vs GDP tantalisingly close to 100% now) has led to calls for greater action on stimulus spending at the same time as greater control on deficit creation – a tough job made tougher by downwards pressure on a currency that still (just about) acts as the world’s reserve currency of choice, and some growingly impatient creditors. It was no coincidence Obama broached the subject after a 3-day trip visiting his bankers, ahhmm - I mean the Chinese.
Japan is in Asia too…
Whilst all eyes have been on Obama’s visit to China this week as part of his first official trip across Asia, we must not forget the importance of Japan in the region and the long-standing relationship the world’s two largest economies (for now) share dating back post the second world war. Earlier this year, Hilary Clinton made one of her first stops in Tokyo, a sign of the strategic importance the economic power in the region holds for the US – especially with the rapidly rising strength (in all senses of the word) of the world’s former factory. Japan’s role, in both the global-economy and politics, is likely now more important than ever.
It is easy to forget that Japan is still the world’s second-largest holder of US$ denominated-assets, what with all the recent focus on China China China. The sharp and sudden appreciation of the Yen vs the US$ since July this year (+9%) catching a number of export-dependent Japanese firms off-guard after a period of Yen weakness stretching across almost 3yrs (the currency range-traded USD:JPY 110-120 from 2005-208) Estimates place a figure of a still mighty $1.6trn in exposure to US$ assets. Even though the symbolism of Obama carrying his own umbrella as he stepped off the plane in Beijing was designed to strike a memorable image for those Chinese more accustomed to watching their pampered leaders, the inclusion of a number of symbolic meetings on his first stop in Tokyo expressed how sensitive and difficult the balance is between maintaining the cosy relationship with Japan and increasingly flirting with China. Some quite vocal protests were staged by the Japanese at the proposed move of US troops hereto stationed on an island – for a pacifist and normally non-confrontational people this was quite an eye-opener.
The pressure that Obama surely encountered from his Chinese hosts must have had some impact on his temperament whilst walking around the majestic and ancient ruins he visited. His choice of words when discussing the dangers of running such a large deficit and mentioning that double-dip indubitably moulded by conversations held throughout the three-day trip where Chinese decision-makers would have been keen to convey their “concern” over the negative consequences of a dramatic weakening of the US$. It is still very early in the relationship between these two to call any shift in influence – but observers will definitely consider the relatively muted comments from the US President as not only a sign of his grasp of political subtlety, but also the beginning of a new general tone in their dealings.
Markets…
On the markets, we’ve had a bit of a stutter in Asia during this week, with mixed performance between the larger indices there: HSI -90bps in last 3 days, CSI +45bps and the likes of Vietnam and Indonesia remaining at lofty YTD returns (+78% & 83% respectively) even as some money is reportedly coming back off the table as we near the end-of-the-year. Despite India’s excessive spending on Gold over the last month, the Sensex there has managed to recover from a bit of blip at the start of November (+8.4% and is back near its highest level in 18mths. Middle Eastern markets have seen a strong degree of interest in perennial laggard Qatar (finally!) with the DSM there appreciating 6.3% in 3 sessions. European bourses are off about 30bps today after a slow and sticky US overnight, but still positive for the week so far. Gold slightly lower pulling back below $1,140/oz, Oil very actively moving between $79-$81 ostensibly content to hang around what is perceived to be a high-enough level to elicit inflation hears, and the BDIY goes from strength-to-strength, rising +6% today alone – maybe someone decided to buy those “cute rats” as corporate gifts.
So, another busy week in both the markets and geo-political scene, providing ample ammunition for pundits to create their own outlandish conclusions to fit their requirements. We are nearing the end of what has been a fairly resilient period in the markets, and today already the first of what will be too many e-mails have appeared with predictions for 2010. Let’s first try to get through December and deal with a number of investment managers closing their books before considering another 365 days of market minefields.
As for that Obama umbrella moment again, maybe he really had no choice but to hold it aloft himself with secret service refusing to pay their boss any attention after catching him double-dipping his chip in the communal AirForce one salsa bowl.
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