USElections,ChinesePMIandPeterZeihan

So the week is here with the most anticipated binary event of the year expected to play out. How the world economy will behave in either of the situations has been analysed extensively. How the world will see a lesser dose of anti-trade rhetoric and less punitive actions on China in case the Democrats win, the White House has been assimilated into the market levels across asset classes. In case of a Republican win, the market expects a more strident status quo approach. Nowhere the effect is more pronounced than the levels of Onshore Chinese Yuan which has shown a constant uptrend in recent months.

Though not of immediate use, it is important to see the current US elections shorn off in such a neat binary classification. Global macro strategist Peter Zeihan writes in his latest book The Disunited Nations that the thinking that the world will revert back to normal times where untethered globalization is the central thought in case a particular party returns to power is mostly misguided. Zeihan writes that post WW II the world order which was created with US and USSR Russia as its two pillars got completely changed after the latter’s demise in 1989. This resulted in the US questioning its policy of subsidising the security needs of a vast number of countries just to keep them on its side in terms of ideology. He writes that the economic boom of many of the countries which were touted as export power houses was predicated on the condition that they had outsourced their military requirements to the US and it provided safety for their freights in the sea. As per Zeihan, post the economic downturn of 2008 and now of Covid, the US hardly has the need to keep supporting the world order irrespective of which party is in power. The retreat is inevitable.

Coming back to markets, the US election results, the Fed meeting and new corona cases will keep the markets on their toes this week. The possibility that the results can be contested, prolonging the reign of uncertainty, means that market participants will do well to keep their positions light.  This means that equities and emerging market currencies are expected to trade soft. On the other side the effect of a new wave of lockdowns has also started showing its impact. The first casualty is the price of oil - Brent Crude is trading around 35.70 $/bbl its lowest since May.

In the important data which came out last week, US GDP showed a 33% growth YOY for Q3. Though the economy is still lower when compared in absolute size terms. Caixin Manufacturing PMI data for China, which released today, rose to 53.6 levels in October from 53 in September. The PMI data shows that the manufacturing sector is on the road to recovery whether on the back of pent up demand or stimulus driven government spending hardly matters. The euro and pound sterling both have retreated against the US dollar both on the back of the second wave of corona cases as well as the hundredth wave of Brexit negotiations.

Domestically, the INR trades at its lowest level in two months around 74.45 levels. The 10 year benchmark bond trades at 5.89 levels.