Vaccinehopes,TradedataandDavidRicardo

There are several themes which are currently at play in the global markets. The important ones being the hope regarding the vaccine, US presidential elections and Sino US trade issues. At the second level of primacy we can stack up issues like Brexit, alternating tensions and peace in Middle East, tensions between India and China. These latter issues, though important, are however limited in impact to particular regions (EZ, India) or products (example oil). Hence any analysis of world affairs essentially follows a waterfall approach with US, Fed and dollar invariably appearing at top.

The race to the US Presidential election is heating up with major protagonists not holding any punches. President Trump has gone full throttle on his Twitter feed. His announcement yesterday that a vaccine could be ready within four weeks met a muted response on Wall Street as the Dow Jones Index closed virtually unchanged from the previous closing. With the economy contracting and close to 6.6 million covid cases in the US it is understandable that the vaccine is an important and emotive issue for the electorate.  On the other hand there is still no consensus on the second round of pandemic relief package with Democrats announcing on Tuesday that they remain opposed to any “skinny” deal on relief.

Moving on to Fed news, the important event of the week is upon us today which is the FOMC meeting. The tone of the statement is expected to be cautious but it will also acknowledge the good news on the unemployment front where the rate has moved down better than expected (last NFP report). With the average inflation targeting regime already in place, markets won’t be impacted much unless the tone is extremely bullish from the Fed. The call for a more pronounced fiscal support, which the Fed has been making, has not been heeded as we wrote above. Personal consumption forms 70% of US GDP hence it is widely understood that any stimulus which supports that consumption directly is going to have a better impact on GDP growth. The Fed’s arsenal on stoking that direct consumption are limited to say the least. It can’t write a USD 1200 relief cheque to every citizen unlike the government.

Domestically we had the release of trade data yesterday for the month of August. It showed that exports fell by 12.66% and imports by 26% leaving a trade deficit of around USD 6.77 billion for the month. As the calls are renewed in India for import substitution and, even globally, trade barriers are being put up , it is an opportune time to briefly revisit the theoretical construct behind the free trade dogma. The concept that trade is beneficial for all parties involved was first propounded by David Ricardo in his Theory of Comparative Advantage in the early 18^th century. It was an insightful improvement over Adam Smith’s Theory of Absolute Advantage. Due to paucity of space we will take up Ricardo’s theory in detail later but will leave it here by saying that it is one of the most seminal works on which the modern globalized economy is based.

On the bond side, Indian bonds had a relatively good day yesterday on the back of better than expected CPI data on Monday. All eyes are now on the Governor’s address due at 11:00 am. The benchmark 10 year bond trades at 6.0250 currently.