This week brings Prime Minister Abe’s fiscal plan, the Reserve Bank of Australia’s rate decision, the Bank of England’s monetary results and U.S. nonfarm payrolls on Friday. So let’s put some perspective to tonight’s main events. The RBA will announce its overnight interest rate and consensus is calling for a 25 basis point CUT to 1.5%. Analysts believe that the weakness in the natural resource sector is aiding the reduction in capital expenditure. Also, Aussie inflation is at the bottom of the RBA‘s target range, which provides rationale for the RBA. I am not so sure of a CUT for this is coming at the end of Governor Stevens’s term at the RBA. Dr. Phillip Lowe will take over September 16 so this is the penultimate meeting for Mr. Stevens.
Every minister of finance and central bank head is noting the uncertainty caused by the BREXIT vote and is being cautious in word and deed. The fact that global equity markets have rallied post-Brexit may give Governor Stevens the latitude to give his successor the ability to cut rates upon the onset of global headwinds. The Aussie has rallied against the U.S. dollar but the Aussie has been weak against two of its main trading partners: the KIWI and YEN (though is stronger versus the Chinese yuan). I make the rate cut a toss-up but would look for technical support on the Aussie dollar outright. Why? If the Japanese government announces a larger FISCAL STIMULUS than has been previously publicly vetted, it may be bullish for the natural resource producers. A global-oriented fiscal stimulus initiative could push the Aussie dollar higher especially as it has short-term interest rates much higher than other developed nations.
The markets are expecting a 28 trillion YEN fiscal package from Abe but there is much dissension about the various elements that will be the key components. Will it be large infrastructure projects such as PORT enhancements in rural areas, a new high-speed train or a reinvigorated LENDING SCHEME, which will provide cheap funding for small and medium enterprises? There has been discussions about tuition and wage enhancements for the lower-income Japanese citizens. Combined with the recent BOJ announcement about enhanced U.S. DOLLAR lending facilities for Japanese financial institutions the NIKKEI OUGHT to be the bellwether of market sentiment. The NIKKEI rally has stalled since the BOJ disappointed investors with no rate cut and no new additional bond purchases July 29.
The increased Nikkei ETF purchases has provided some support for Japanese equities but the sizable YEN rally has been a negative for overall for the stocks of Japanese exporters. THE MARKET NEEDS TO SEE THE CORRELATION OF NIKKEI to the YEN decouple for verification of the success of any Japanese fiscal stimulus policy. Be patient as the new plan is unveiled tonight.
***Keep this on your radar: Hinkley Point. In the post-Brexit world analysts surmised that the British would be the odd-man out and be punished for the temerity to exit the European Union. The BRITS were to move to the back of the “queue” for trade deals. They were also labeled an international PARIAH, which would result in the collapse of London as a global financial center. It is far too early to determine the correctness of forecasts, but during the past week it has been Whitehall that has been the progenitor of political and economic surprises.
French energy company EDF, which is 85 percent government-owned, approved the entire Hinkley Point nuclear reactor project in a 10-7 vote. (There must have been much arm twisting from the Hollande Government searching for some success ahead of next year’s election.) Several EDF board members were opposed to the project but it seems that concern for French jobs and the entire French nuclear industry wanted the project to proceed as planned. Two Chinese nuclear firms were also to aid the funding of the 18 billion euro reactor in an effort to get a foot into the British energy sector.
The French nuclear industry has been under stress since the Chancellor Angela Merkel passed legislation decommissioning much of its nuclear capacity in the next decade. However, British Prime Minister May called for a review of the entire Hinkley Point project on Friday, citing concerns over the Chinese gaining control over a large segment of the British energy industry. This may in fact be the case–new Prime Minister, new agenda–but there may be other reasons. The Brits are very unhappy about Brussels’ choice of its Brexit mediator, Michel Barnier, who has a past history of being a harsh negotiator in his dealings with the U.K.
We won’t know what prompted Prime Minister May to call for a delay of Hinkley Point until further research confirms the benefits of such an enormous endeavor. One thing is for certain: ALL PREVIOUS ANALYSIS OF THE BREXIT VOTE IMPLIED A STATIC MEASURE OF BRITISH POLICY. Prime Minister May knows she has strengths to play in negotiations with the EU and she will be dynamic in employing these measures. Hinkley Point is important for the French and it could be easily funded by an ECB searching for any BONDS to buy to meet the 80 billion euros a month target. This deal was an economic no-brainer but is now an instrument of political negotiations. It won’t be easy but the world is dynamic and always in motion. Beware of analysts caught in the quagmire of static thought. Tomorrow we will look at the Bank of England, and more odds and ends.