I expect markets to open a bit directionless today.
There was a sell-off late last week in ‘risk on’ assets.
The Nasdaq Technology Index dropped just under 1% on Friday. The Aussie dollar dropped just over 1%.
And commodities like copper pulled back a tad too. But it’s been running pretty hard lately, so a pause was probably overdue.
So, my best guess is it’ll be a ‘wait and see’ day on the Aussie markets today, before we get a clearer lead from US markets overnight.
Because there were some manoeuvrings in US politics over the weekend that might take effect tomorrow.
Of course, where we finish up by the end of the week is anyone’s guess?
These days, no possibility is off the table.
I don’t think we’ve ever seen such an unpredictable market in terms of possible outcomes.
And at the centre of this turbulent reality lies the presidency of Donald J Trump…
What will Trump do next?
According to the polls — if you believe them — he’s currently running behind rival Joe Biden. And with the US election only three months away, he’s not going to go away quietly.
Trump’s been very busy of late…
His latest move was over the weekend.
He decided to bypass congress and approve a set of orders to suspend payroll tax and extend some unemployment benefits after the Republican and Democrat leaders couldn’t come to an agreement.
At first glance these might seem like reasonable measures given the state of things right now.
But, good or bad, right or wrong, some legal experts claim he doesn’t have the constitutional right to make such decisions.
‘Mark Mazur, director of the Tax Policy Institute, noted in an interview with Roll Call this week that only Congress has the power to halt collection of taxes.’
Legal challenges are coming.
Which is probably what Trump wants.
He’ll claim he’s making the hard decisions because congress isn’t doing its job.
He’s betting — and he’s probably right — a lot of Americans who are struggling will instinctively back him in this fight against career politicians annoyed at their power being curtailed.
Trump knows how to pick his fights.
Though, the Americans are usually staunch advocates of their hallowed constitution, so I could be wrong here.
For us Australians, all this political manoeuvring would usually just be entertainment. And no matter who would win, it wouldn’t really have that big an effect on our daily lives.
But this time is different.
In this race, Trump is also waging a war against our biggest trading partner — China.
This is isn’t just a political scare campaign either, he’s making good on a number of threats.
Chinese tech giants WeChat and TikTok are the latest casualties.
Trump again issued executive orders last week against the two companies — which are big Chinese success stories.
There’s no concrete plan of action here yet, more a vague set of threats.
US Secretary of State Mike Pompeo stated that: ‘We want to see untrusted Chinese apps removed from U.S. app stores.’
It follows White House pressure earlier in the year on ‘five eyes’ partners, including the UK and Australia, to ban Chinese telecom Huawei from lucrative global 5G contracts.
All this talk of ‘security concerns’ is just a smokescreen to give some legitimacy for what is really a political act designed to chop China’s technological rise at the knees.
And then there’s the situation in Hong Kong, which Trump has recently sanctioned heavily in response to China’s aggressive moves here.
The US–China war only seems to be ramping up and my feeling is Trump sees this as a key plank of his election strategy.
So, don’t expect any of this to die down anytime soon.
There’s even the slim, though plausible, possibility of the economic war transcending into some sort of military face-off too.
The biggest risk of a flash point is in the South China Sea, where naval commanders on both sides are flexing their muscles.
I certainly hope not…
The signal to watch
No doubt it’s going to be an interesting three months ahead.
And at a broader level, it certainly feels like an extraordinary time for US politics. A pivotal moment in the direction of the ‘leader’ of the free world even.
What will Trump do to survive?
What would a second term Trump presidency even look like?
And what if the favourite Joe Biden does win? Will he pick up the China war mantle or soften the rhetoric?
Whatever happens, as an Aussie investor, it’s going to affect us more than most US elections.
Which is why you need to look beyond the headlines. And there’s a reasonably simple way for you to do this.
You see, any danger signal for us will show up clearly in the Aussie dollar.
Our dollar is actually the fifth most traded currency in the world, a fact which belies the size of our economy.
The Aussie dollar is seen as a proxy for confidence in global growth. It’s also a good rule of thumb barometer of demand for Aussie commodities.
If it falls sharply, that’s a sign you need to start thinking defensively.
On the other hand, if it holds up OK, then you can probably ignore the rhetoric and political gamesmanship for now.
The key point is what happens between China and the US has never been more important to Australia.
Which makes this US election critical to us.
But markets don’t care about politics. They only care about outcomes. Keep your eye on the Aussie dollar and plan accordingly.
Editor, Money Morning
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