Ahead Today
G3: Germany Zew Expectations, US NFIB Small Business Index
Asia: China Money Supply and New Yuan Loans
Market Highlights
Markets are took an upbeat tone as the US government shutdown disruptions look closer to ending, with the dollar marginally weaker and risk assets stronger, all this also helping Asian currencies to some extent strengthen at the start of the week. In particular, a final Senate vote to pass a spending bill is expected soon later today Asia time, while it will subsequently go to the House for approval likely on Wednesday. Under the current agreement, the US Congress would pass full-year funding for the Departments of Agriculture, Veterans Affairs and Congress itself, while funding other agencies through 30 January, with the Democrats securing a pledge by Senate Republicans to vote on a bill to renew Affordable Care Act tax credits by mid-December. All this of course raises natural questions about what as we head into 30 January and whether it will be deja-vu once more, but for now markets are taking progress in its stride. Assuming the government shutdown ends soon, we will likely get some of the key US data for September such as non-farm payrolls within a few days.
The other piece of positive news is the ongoing implementation of the US-China trade truce that was agreed to recently. We saw a range of announcements yesterday by both the US and Chinese side, and most importantly the suspension of the BIS 50% affiliate, and from the Chinese side moves to suspend port fees and also impose control on fentanyl related drugs. There remains some key differences in interpretation between both sides and in particular on China’s export control measures, but the totality of moves seen suggest good faith implementation of the trade truce for now.
The recent sell-off in risk assets last week perhaps exacerbated by the US government shutdown, and coupled with questions around valuations of AI companies has raised some concerns around whether risk sentiment will continue to see sharp declines moving forward. As a base case, our reading of the leading indicators such as metal prices on Asia’s exports from a fundamental perspective, coupled with economic surprise indicators suggest that risk assets should still remain supported at least into 1Q2026. For what it’s worth, economic surprises as defined by positive growth minus lower inflation surprises have roughly a 6 month leading relationship with changes in global equity markets historically, and in level terms that could imply risk assets rising a further 10% from here just based on the historical relationship.
The other key piece of news in Asia was indications from Trump that he will be “bringing the tariffs down” for India with a repeating of Trump’s claims that India has reduced its purchase of Russian oil substantially and that the US is close to a trade deal with India. As a working base case we think tariffs will probably come down towards to 25% level from current 50% level – so lower than the current exorbitant rates right now but still higher than some of India’s key export competitors. On that front we think the binding constraint to agreeing to a trade deal between India and the US may be more political rather than economic, given multiple other factors at play including the India-Pakistan conflict and how it was resolved.