Rabobank: The Purge Could Contribute To A Widening Of The Cultural And Political Divide

By Michael Every of Rabobank

On Friday Twitter took the decision to permanently suspend President Trump from its platform due to the “risk of further incitement of violence”.  The day before Facebook had already blocked him.  Tech giants have also moved against right-wing social media platform Parler, with Apple and Google removing it from their app stores over the weekend and Amazon withdrawing the cloud service in which it stores its data.  In view of the events on Capitol Hill last week, the actions have brought relief for many.  However, this news has also sparked warnings that the actions of the tech giants cannot make dissenting opinion vanish and that the purge could contribute to a widening of the cultural and political divide in the US. 

For certain there are concerns that the Democrats’ efforts to impeach the President could underscore amongst his supports Trump’s unfounded allegations that the November election was ‘stolen’ from him.  Democrats are expected to introduce a motion to the House of Representatives today calling on Vice-President Pence to invoke the 25th Amendment in order to strip Trump of his office.  If Pence fails to do so, they plan to impeach Trump later in the week.  For Senate Republicans, however, this looks to be a step too far.  While several have publically criticised the President for his role in the last week’s violence in Washington which led to the death of five people, many have indicated that impeachment may not be the best way to hold Trump accountable.  Senator Toomey instead has called for the President to resign and “go away as soon as possible.”

Despite the momentous issues concerning Democracy in the US, the focus of markets is the likelihood of a surge in deficit spending under the Biden Administration.  On Friday the President-elect called for “trillions of dollars” in immediate further fiscal support, which included higher direct payments to individuals.  The statement coincided with an unexpected 140K slump in December non-farm payrolls.  This likely reflected the delay of fresh fiscal stimulus towards the end of last year and the impact on the labour market of the worsening in coronavirus crisis.  Expectations of further stimulus have been supportive of risk appetite of late, though higher bond yields weighed on Asian equities overnight and on US stock futures.  Having closed at a 3 decade high on Friday, the Nikkei 225 was shut today for a Japanese holiday. 

Last week various Fed officials appeared mostly relaxed about the move higher in yields.  Several Fed speakers are scheduled to speak during the course of the coming week which could help develop the market’s collective opinion on whether changes to the fiscal outlook could alter the Fed’s guidance during the course of the year.  Even though a rise in inflation expectations leaves real yields in the US extremely low, higher nominal yields has triggered a wave of profit-taking on short USD positions.  The stronger USD and higher bond yields has also sparked a plunge in Bitcoin and in gold prices this morning.  Oil is also trading lower, though this may in part be the result of further worries about the impact of Covid related restrictions on demand particularly given the news that more than 11 million people in the northern Chinese city of Shijiazhuang have been placed into a stringent lockdown after an outbreak of Covid-19. 

Last week PM Suga placed Tokyo and some surrounding regions in a state of emergency due to the rise in Covid cases.  Today Japan has announced that another mutant strain has been detected in four people who arrived from Brazil.  Millions have already been placed in lockdowns or in various restrictions across Europe and the US, with governments under pressure to accelerate the roll-out of vaccine programmes.  The EU has reportedly secured a deal to double its supply of the Pfizer-BioNtech vaccine after its slow start to its programme.  In the UK, 7 mass vaccination centres are due to open this week as the government attempts to increase its target from 200K jabs a day to 2 mln a week.  

The sharp rise in US Treasury yields has also dented the bullish momentum of EM currencies with losses led by the South African rand followed by another popular EM yielder the Brazilian real. In our view we are witnessing a short-term correction across EM following impressive gains in Q4 rather than a major shift in the underlying bullish trend which remains underpinned by capital inflows into EM assets driven by accommodative monetary and fiscal policies and expectations that major economies will return to normality thanks to coronavirus vaccines. If the rise in US Treasury yields mainly reflected growing market expectations that the Fed may start normalizing its monetary policy much sooner than envisaged only a few months ago, we would be far more concerned about the outlook for EM. It is not, however, the case as the squeeze in US yields can be mainly attributed to the market expecting expansionary fiscal policy under Biden’s presidency. It is also important to stress that the Fed cannot allow financial conditions to tighten too much through rising yields at the time when the US economy is still in the doldrums. At this very early stage of the economic recovery the Fed is likely to prevent Treasury yields from rising to levels that would make EM assets unattractive and resulting in capital inflows to slow down or even being partially reversed. Such a moment is likely to come when the Fed starts withdrawing its unprecedented stimulus, but not yet as this major headwind to EM may not start blowing hard until well into 2022 or even 2023.