Asia In Demand

November 16, 2020 — Mitul Kotecha

Equity markets managed to shake off Covid concerns at the end of last week despite virus cases in the US reaching a record high and Europe battling a full-blown second wave; S&P 500 and Russell 2000 hit record highs.  Asian equities started the week building on this positive momentum.  Helping markets was the news that advisors to President-elect Joe Biden have said they oppose a nationwide US lockdown despite the sharp rise in virus cases.  This will help allay fears that the US economy will weaken sharply over the next few months amid severe lockdowns and before a vaccine can be distributed.

Vaccine enthusiasm will likely play against Covid escalation in the days and weeks ahead. In the near-term slim chances of a sizeable US fiscal stimulus taken together with a more rapid increase in global Covid infections highlight clear risks to risk assets, and this may be enough to put roadblocks in place at a time when various equity indices are reaching key technical levels.  Conversely, it is too early to write the US dollar off in the short term even if the medium-term trend is likely to be downwards. 

Asia remains favoured within emerging markets, as the virus has come under control across most of the region.  News of the signing of the Regional Comprehensive Economic Partnership (RCEP) trade deal by 15 countries in the region after 8 years of negotiations, but without the US and India, provides another boost to regional economic and market prospects.  The deal is less extensive than the Trans-Pacific Partnership (TPP) as it removes around 90% of tariffs rather than 100% under TPP.  Nonetheless, it is estimated that the deal could boost the global economy by close to $200bn by 2030.  Although the deal still has to be ratified by a number of countries it is a step closer to a unified trade block like the EU.   

Additionally, Chinese data today ought to be supportive for regional assets even amid the threat of further sanctions by President Trump’s administration in the weeks ahead. China’s October activity data including industrial production fixed assets investment, property investment and the jobless rate were on balance positive, showing that China’s economic recovery is gathering steam.  The data will likely provide further support to China’s markets including China’s currency, though it effectively seals the case for no further easing by China’s central bank, PBoC, while giving the rest of Asia more fuel to rally. 

Over the rest of the week emerging markets central banks will garner most attention, with a plethora of policy rate decisions on tap.  Hungary (Tue), Thailand (Wed), Philippines (Thu), South Africa (Thu), and China (Fri) are set to keep policy rates on hold while Indonesia (Thu) is likely to cut by 25bps and Turkey is expected to hike its policy rate by 475bp hike (Thu).   Turkey in particular will be a focus in this respect given the replacement of central bank governor and the more than 10% rally in the Turkish lira last week.

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Finally, Back To The Economy

November 8, 2020 — Mitul Kotecha

The election of President Elect Biden marks a new dawn for the US and the world.  The world had held its breath since Tuesday’s US election, wondering whether there would be four more years of the same or change.  A new Democratic President elect together with a split Congress, is arguably one of the best outcomes that markets could have hoped for, notwithstanding the fact that President Trump refuses to accept defeat. 

While the Senate is still up for grabs it seems more likely than not to stay in Republican hands; the Georgia run offs on 5 January could result in 50-50 in the Senate and effective Democrat control via Vice President elect Harris, but the probability of this is small.  As such, there seems little prospect that a Republican led Senate -– will be pliable to President elect Biden’s biding. 

Why is this good for markets?  It means that policies and members of Biden’s cabinet will likely veer towards more centrist as opposed to leftish aims.  It will for example, be difficult for Biden to hike taxes, which will take out some of the sting from a likely smaller fiscal package than Democrats had hoped for. And limited fiscal spending may keep the onus on the Fed to provide liquidity, underpinning markets further.  

Now that the Presidency has been decided, attention will turn at least in part, back to Covid and the economy.  Neither look encouraging.  Covid cases in the US have reached record levels.  US October jobs data released at the end of last week revealed an above consensus 638,000 increase in non- farm payrolls though the level of payrolls is still down a sizable 10.1mn from the level in February and the fading CARES Act spending alongside surge in Covid cases indicates risks to any further improvement going forward.

Top tier data is limited this week in the US, with inflation (CPI) as the main release on tap (Thurday).  Nonetheless, risk assets/equities are likely to continue to take on a positive tone in the wake of the election outcome. The USD is likely to remain under pressure as risk assets rally. 

A Biden presidency, split Congress bodes well for Asia.  The US stance on China would likely be more nuanced and US stance on trade would likely be more supportive.  As revealed in China’s October trade data over the weekend, exports are holding up particularly well even ahead of a Biden presidency; exports rose by a very healthy 11.4% y/y in October.  

The USD is likely to depreciate in the months ahead in the wake of a Biden win/split Congress, while US rates are likely to remain suppressed, which all point to Asian FX strength.  Fundamentals also point positively for Asia. Much of the region is recovering well from Covid related weakness, led by China, which now appears to be firing on all cylinders.

Posted in Asia, Asian currencies, Biden, Bond markets, central banks, China, COVID-19, Currencies, Economics, emerging markets, equity markets, Federal Reserve, Fiscal/Budget, FX, Interest rates, Monetary Policy, Trump, US, US administration. Tags: , , , , , , , , , , , , , , . Leave a Comment »

Still Buying On Dips

October 11, 2020 — Mitul Kotecha

US stocks had a positive end to the week despite the ongoing uncertainty over a new fiscal stimulus package.  A buy on dips mentality continues to hold on any sell off in equities and risk assets in general.  Although President Trump is now calling for a much larger stimulus, Treasury Secretary Mnuchin has only edged close to Democrats demands for a $2.2 trillion stimulus, by offering $1.8 trillion.  This was subsequently rejected by House speaker Nancy Pelosi.  A deal this side of the election still looks unlikely given the differences between the two sides in not just the size, but also the content of further stimulus.  Either way it’s doubtful this will stop equity markets from moving higher in the interim.

Although markets will continue to keep one eye on the approach of US elections this week – especially on whether President Trump can try to claw back some of the lead that Democratic Presidential contender Joe Biden has built according to recent polls – it is a busy one for events and data, especially in Asia.  Key US data releases include US September CPI inflation (Monday) and retail sales (Fri) while in Australia a speech by the RBA governor (Thu) and employment data (Fri) will be in focus.  In Asia monetary policy decisions by central banks in Indonesia (Tue), Singapore (Wed) and Korea (Wed) will be in focus though no changes in policy are expected from any of them. 

In Singapore, the 6-monthly policy decision by the Monetary Authority of Singapore is unlikely to deliver any major surprises.  Singapore’s monetary policy is carried out via its exchange rate and the MAS is likely to keep the slope, mid-point and width of the Singapore dollar (SGD) nominal effective exchange rate (NEER) band unchanged amid signs of improvement in the economy. Singapore’s government has announced several fiscal stimulus packages (February 18, March 26, April 6, April 21, May 26, August 17) helping to provide much needed support to the economy, with total stimulus estimated to amount to just over SGD 100bn.  Much of the heavy lifting to help support the economic recovery is likely to continue to come from fiscal spending.

In Indonesia, the central bank, Bank Indonesia (BI), has been on hold since July and a similar outcome is expected at its meeting on Tuesday, with the 7-day reverse repo likely to be left unchanged at 4%. However, the risk is skewed towards easing. Since the last meeting the economy has suffered setbacks. Manufacturing confidence deteriorated in Sep, consumer confidence has also slipped while Inflation continues to remain benign. However, BI may want to see signs of greater stability/appreciation in the Indonesia rupiah (IDR) before cutting rates further.

Chinese data including September Trade data and CPI inflation (both on Thursday) will also be scrutinised and will likely add to the growing evidence of economic resilience, that has helped to push China’s currency, the renminbi (CNY) persistently stronger over recent weeks.  Indeed, the CNY and its offshore equivalent CNH, have been the best performing Asian currencies over the last few months.  This is a reflection of the fact that China’s economy is rapidly emerging from the Covid crisis and is likely to be only one of a few countries posting positive growth this year; recent data has revealed both strengthening supply and demand side activity, amid almost full opening up of China’s economy.

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Host Of Central Banks In Focus

September 13, 2020 — Mitul Kotecha

Well, last week, tech stocks had their worst week since March, with stability far from returning.  While the jury is still out, most still view the pull back in tech stocks as a healthy correction following a prolonged period of gains, blaming increased options activity over recent months for the magnitude of the decline. The buy on dip mentality is likely to continue to prevail, though tech stocks have not yet show any sign of wanting to make a convincing pull back.   

Signs of nervousness are clear; equity volatility remains elevated, but many investors are still sitting on healthy gains over recent months.  Given the low cost of funding, low returns in government bonds, alongside continued strong demand for stay at home electronics and a vaccine that could still take months to arrive, it is hard to see the tech sector falling too far.   

The fall in the pound sterling has been quite dramatic over recent weeks, both against the US dollar and euro.  Fears over a collapse in trade talks with the European Union have intensified.  The sudden waking up of the market to these risks has been provoked by the prospects that the withdrawal agreement with the EU will be torn up, prompting threats of legal action by the EU.

Time is running out to get a deal on the table before the end of the Brexit transition period at the end of the year, but UK Prime Minister Johnson has said that the internal market bill is necessary to prevent “a foreign of international body from having the power to break up our country.” The new legislation is already facing a rebellion in parliament. Against this background its hard to see GBP rally, with the currency likely to be particularly volatile over the coming weeks.

Attention this week will turn to several central bank decisions, with monetary policy makers in Poland (Tue), US (Wed), Brazil (Wed), Japan (Thu), Indonesia (Thu), Taiwan (Thu), South Africa, (Thu), UK (Thu) and Russia (Fri) all scheduled to announce their decisions.  After months of policy easing globally, this week will look rather boring, with none of the above likely to ease further.   

The Fed FOMC meeting will likely capture most attention, but there is potential for disappointment if the Fed does not provide further details on its shift to average inflation targeting in its forward guidance, even as the accompanying statement and Chair Powell’s press conference are likely to sound dovish. The US dollar has continued to stabilize, aided by the drop in GBP, but a dovish Fed could limit further upside in the short term. 

Aside from central bank decisions attention will be on US election polls, which take on more importance as the election creeps closer.  US fiscal stimulus talks have hit a wall, with little chance of progress this week, while US pressure on China and Chinese companies is likely to continue to be unrelenting as elections approach.  On the political front the race to take over Japan’s prime minister following the resignation of Shinzo Abe will conclude this week (Wed).   

Posted in Asia, Asian currencies, Bank of England, Bank of Japan, Bond markets, Brexit, central banks, China, coronavirus, COVID-19, Currencies, Economics, Economy, equity markets, Europe, eurozone, Federal Reserve, FX, Indonesia, Interest rates, Japan, Monetary Policy, Politics, Taiwan, Trump, UK, US, US administration. Tags: , , , , , , , , , , , , , , , , , , , , , , . 1 Comment »

Will Stability Return?

September 6, 2020 — Mitul Kotecha

After a very nervous end to last week, with US tech stocks leading the sell-off in US equity markets amid lofty valuations, heavy positioning and stretched technical indicators, markets will look for signs that stability will return in the days ahead.  However, the November US election is increasing in prominence as a market driver, something that is beginning to manifest itself in equity volatility and will likely play more of a role for FX and rates markets volatility going forward. 

The fact that there has been little progress between Democrats and the US administration on further fiscal stimulus adds to the uncertainty for markets ahead of US elections.  Also after Fed Chair Powell’s Jackson Hole speech in which he unveiled a new average inflation strategy, markets will look for this to be reflected in forward guidance. This could happen as early as this month’s FOMC meeting on September 16 but will more likely take place later.

After a torrid several weeks the US dollar made some recovery last week amid short covering, but underlying sentiment remains weak (latest CFTC IMM data shows speculative USD positioning languishing around multi-year lows).  Whether the USD can make a more sustainable recovery remains doubtful in the weeks ahead of US elections and is more difficult given the Fed’s more dovish shift.  However, in the near term there may be more scope for short covering.

Key highlights this week are China Aug trade data today, US Aug CPI (Fri), Bank of Canada meeting (Wed), European Central Bank (ECB) and Bank Negara Malaysia (Thu).  Among these the ECB meeting will be interesting; while a policy change is unlikely the ECB will probably highlight its readiness to act further to address downside inflation risks.  The ECB may also be more vocal about the recent strengthening of the euro to a two-year high, but aside from jawboning, there is little the ECB is likely to do about it. 

Emerging markets assets have benefitted from a weaker USD and but with growth remaining under pressure as likely to be revealed in weak Russian and South African GDP data this week while Covid cases in many EM countries continue to rise rapidly, risks remain high.  China’s trade data will give some early direction this week, but with US-China trade tensions only likely to escalate further, the outlook for emerging markets assets is clouded in uncertainty. 

Posted in Asia, Asian currencies, Bond markets, Canada, central banks, China, COVID-19, Currencies, ECB, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, FX, Interest rates, Malaysia, Monetary Policy, Politics, Trade, Trump, US, US administration. Tags: , , , , , , , , , . Leave a Comment »
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