The Opening Belle

September 25, 2020 • Estimated Reading Time: 7 minutes

Asian shares are having a better day, but still on course for their largest weekly drop since March.

U.S. futures are in the green this morning too;

European markets look to continue the positivity, with Stoxx 50 futures +0.4% in early trade.

 European Opening Calls:#FTSE 5865 +0.73%#DAX 12676 +0.55%#CAC 4787 +0.52%#AEX 545 +0.63%#MIB 19045 +0.73%#IBEX 6688 +0.68%#OMX 1784 +0.34%#STOXX 3173 +0.43%#IGOpeningCall— IGSquawk (@IGSquawk) September 25, 2020 

Some commentators are attributing this improved sentiment to a potential stimulus package so let's start there...

Pelosi and Schumer, who initially sought a $3.4 trillion relief package, have since scaled back their demands to $2.2 trillion. Neal said a new legislative package would be somewhere near $2.2 trillion. Some media reports said it could be $2.4 trillion.

But it was not clear whether the White House would agree to such a sum. Meadows has said that Trump would be willing to sign a $1.3 trillion relief package.

Meanwhile, Senate Republicans, who have not been involved directly in the negotiations, initially proposed a $1 trillion bill, which was rejected by many Republicans who thought it too large and by Senate Democrats who said it was too small.

Senate Republicans later tried and failed to bring a smaller $300 billion bill to the floor.

There are plenty of reasons to believe this is just a Democrat messaging exercise, presumably to make it appear that the current Republican administration failed to deliver.

It's a high-risk political strategy if so.

For what it's worth, most analysts/models had projected a stimulus deal of around $1 trillion, so that's likely the "bar" for the markets.  

I remain sceptical about anything being agreed this close to the election.  

Especially when the polls are so tight in the key battlegrounds;

Australia are the first to move on this.

Other countries are likely to follow.

This is the crisis playbook after all.

Central banks make cheap liquidity available to banks, who then can't/won't pass this on to the public due to regulations/internal risk standards.

So, how do we solve this?

Loosen the regulations!

Shares of Australia’s “Big Four” banks rallied after the announcement but the move, which needs legislative approval, has attracted criticism from consumer groups and analysts who say the relaxed laws water down protections designed to reduce financial risks.

Australian Treasurer Josh Frydenberg said the changes will ease the regulatory burden and cut the cost and time faced by consumers and small businesses seeking to access credit

“The flow of credit will be absolutely critical to our economic recovery,” Frydenberg told reporters in Canberra. “But our current regulatory framework, with respect to lending...has become overly prescriptive, and responsible lending has become restrictive lending.”

But the need to stimulate the country’s economy has led lawmakers to now relax their tough stance.

“Before the Royal Commission banks had very poor reputations and after the Royal Commission it got worse because it showed that they’ve been lending quite irresponsibly,” CLSA senior banking analyst Brian Johnson said.

“Now what we are seeing is politicians ... basically embracing what it previously would have called irresponsible lending.”

JPMorgan said while changes might cut costs and boost cash earnings in the short term, runaway growth in household credit would be a concern, even though the pace of such growth was still very modest.

“We caution that Australia is starting with amongst the highest household gearing in the world,” it said.

This last point is why fiscal stimulus is so important across the developed economies.

There is limited scope for people to take on more debt in a slowing economy (especially when they are already heavily indebted).

Victoria virus restrictions should be eased further over the weekend, after reporting only 14 new cases and eight deaths in the last 24 hours on Friday, further reducing the rate of infections.

And one for the nostalgic...

Evergrande are back in the headlines.

 This is arguably the biggest story in Chinese markets today.

Here's the background on the China Evergrande issue.https://t.co/t6MFxtkc6w pic.twitter.com/0q0mUoOWJD— David Ingles (@DavidInglesTV) September 25, 2020 

David mentioned Evergrande back in August last year, and subsequently took a short position that worked out pretty well.

Evergrande, and other property developers are running high debt levels. These have been a concern to the CCP for some time.

China is attempting to address this with their "three red lines" strategy;

Pre-Covid, there was a lot of media coverage and concern regarding China's systemic risks; high debt levels and a huge shadow-banking sector chief among them.

These issues may well return to the spotlight.

A quieter calendar today offers very little of interest.

U.S. durable goods orders the only one to keep half an eye on.

Thankfully, most of the central bank speakers have worn themselves out and decided to take a long weekend.

ECB's Villeroy & De Cos are set to speak at 07:45.Fed's Williams will speak twice; First at 14:00 with Community Development Leaders, then at 20:10 on the Covid-19 job market.