Morning Commentary: One Step Back Two Steps Forward

Foreign Exchange - Morning Commentary
One Step Back Two Steps Forward
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Japan’s Prime Minister Shinzo Abe has been in power for over seven years.  Japan doesn’t have an official term limit for the Prime Minister.  Instead, the PM is limited by the restriction that the ruling party places on its president. 

To this point, Abe’s party recently changed its rule from two straight 3-year terms to three straight 3-year terms in order to allow Abe to continue as PM.  Baring another changing in the party’s rule, Abe’s tenure as PM is set to end in September 2021.  But, is it possible that he could step down sometime in 2020?  

This actually isn’t as outside the box as it might initially appear.  Abe’s government has been hit by a series of scandals over the last several years that has pushed down his popularity.  Should Abe’s popularity fall even further, he could be incentivized to turn over the presidency early.  If Abe waits until his term ends, his successor will be voted on by members beyond those in the National Diet (Japan’s legislature), opening up the candidacy of someone not close to Abe.  By stepping down early, the voting will only be done by members of the two Diet chambers. 

The timing of events later this year also support the chance of an early step back.  On August 24, 2020, Abe will become the longest serving PM.  Additionally, the Tokyo Olympics/Paralympics are scheduled to end shortly thereafter.  Given all this, PM Abe stepping down isn’t the base case but it also isn’t as much of an outlier as it initially appears. 
  • The UK has given Huawei permission to build noncritical parts of the UK’s 5G network.  While restrictions will be placed on Huawei, this decision still represents a setback for America’s efforts against the use of Huawei products.  Germany is set to make its decision on Huawei later this year. 
  • The markets are now pricing in ~33 bps of Fed cuts for 2020.  At the start of the year, only ~18 bps were priced in.  The coronavirus does represent a risk, but it is likely transitory and focused in Asia.  With the US economy continuing to perform, markets may have gotten a little bit ahead of themselves.   
  • China announced that it would curb travel to Hong Kong as the virus death toll has now risen to at least 106 people. 
  • Negative Brexit headlines came out overnight with the EU reiterating that it would never compromise the single market and warning London that it was underestimating the cost of a no deal exit. 
  • US durable goods orders beat expectations, rising 2.4% against expectations for a 0.3% rise.  However, excluding transportation items, durable goods sales fell 0.1% against the expectation for a rise of 0.3%.
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