Morning Commentary: Willing But Un-“Abe”-ble

Foreign Exchange - Morning Commentary
Willing But Un-“Abe”-ble    
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Japanese PM Abe’s approval rating declined to ~36% in June, only 1% above Abe’s lowest reading during his current premiership.  Abe’s disapproval rating has also moved up to 49%, the highest it has ever been.  This decline in approval is in contrast with some international peers that have gained public support though the COVID-19 fight.    

Broadly speaking, there hasn’t been a single trigger for Abe’s recent decline.  The initial leg lower was likely triggered by concerns that the government was behind on bending the COVID-19 curve and supporting the economy.  Beyond the virus and the economy, there have also been a series of political controversies for which Abe has had varying levels of responsibility. 

Unfortunately for Abe, a drop in approval ratings isn’t something new with a lack of viable alternatives playing a key role in his recovery.  While this is still the case, there are factors that suggest this time could be different. 

Abe’s relative popularity to his political party (LDP) has fallen to its lowest level.  The LDP still enjoys uncontested popularity with support rates over 30% versus single digit support for other political parties.  However, the percentage of respondents who say they support the LDP because of Abe or his policies sits near an all-time low.  Further, with the economy in a recession with rising unemployment and Abe’s term as president of the LDP ending in 2021, there is material risk for a leadership change or snap elections. 

To be clear, Abe’s support has stabilized following its significant decline.  Should Abe’s popularity fall again, an earlier end to his regime could be in the cards as a leadership crisis could ensue.  Should this happen, a strategic resignation remains an option to reserve influence over the next administration.  A snap election is also another option as it could allow the LDP to consolidate power before other parties are able to reorganize, although for this to happen, a rebound in public support is likely needed.

In terms of market impact, a rising risk for a regime change should be negative for stocks due to increased uncertainty around political stability and the policy outlook.  The impact on USDJPY is a bit less clear.  Likely it would lead to yen strength on market risk off and the potential end of Abenomics/ultra dovish BoJ.  All of this means it will be important to watch opinion polls to gauge which way Abe’s popularity is trending. 
  • US equity markets finished their best quarter since 1998 but continue to face a highly uncertain second half of the year.  Due to the 4th of July holiday, the government jobs report will be released tomorrow and will provide another clue into the state of the labor market.  The corporate earnings season is also scheduled to kick off soon and of course second wave fears continue to persist.  
  • US ADP employment data missed expectations with the report showing the economy adding ~2.4 million jobs against expectations for a 2.9 million print.
  • Fed Chair Powell and Treasury Secretary Mnuchin both gave testimony to the House yesterday but gave different views on the economy.  Secretary Mnuchin talked about a strong rebound while Chair Powell was much more subdued, noting the improving data but also stressing that the virus should keep a rebound in check.  Our view aligns more with Powell.  If the virus isn’t controlled, there can’t be normalization. 
  • Germany takes over the European Union’s rotating six month presidency today.  There is certainly a long list of headwinds to address with the economy forecasted to contract 7.4%, trade tensions with the US lingering and a 750 billion euro rescue package that still needs to be approved. 
  • The deadline for the UK to request an extension to the transition period formally passed at midnight last night.  While a rule-breaking extension is still possible, it seems unlikely.  
  • Eurozone final June manufacturing PMI rose to 47.4 from 46.9.  Italy and Spain both saw significant improvements in their numbers with France and Germany also showing improvement but to a lesser degree. 
  • China made its first arrest in Hong Kong under its new national security law with at least 7 people in custody for promoting Hong Kong independence.  Economic data wise, China’s manufacturing PMI continues to show the economy picking up momentum with a 51.2 print beating expectations for a 50.5 print.     
  • Sweden’s central bank kept its rates on hold, as expected, but surprised markets by expanding QE to SEK500 billion from SEK300 billion and extending it to mid-2021.  The bank will also add corporate debt in September. 
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