Central Banks Galore

June 17, 2019 — Mitul Kotecha

It’s a big week for central banks.  Several central banks globally meet to decide upon monetary policy this week.  The biggest focus will be on the Fed FOMC but this week also sees Norges Bank, Bank of England, Bank of Japan and central banks in Indonesia, Philippines, Taiwan, and Brazil meet.

Markets are already aggressive in pricing in Fed rate cuts.  As US-China trade tensions have worsened markets have intensified their expectations of Fed easing, with around 75bps of easing already priced in.  Given how much is priced in in terms of Fed easing, if the Fed does not validate this with a dovish statement and/or shift in the dot plot there could be a significant risks of disappointment, which could weigh on equities, but leave the USD on a firmer footing.

Admittedly the Bank of Japan is more constrained than the Fed in terms of policy room, but their rhetoric has become more dovish.  I don’t expect easing anytime soon but the BoJ is likely to sound dovish and could offer some enhanced forward guidance.  BoJ governor Kuroda outlined four options in terms of more policy stimulus, with one being a further cut in the deposit rate.  However, BoJ would need to outline how they plan to alleviate the pressure on bank profits from such a move.

Bank of England is unlikely to move.  Data in the UK has been mixed, with softening in Q2 growth but ongoing pressure on inflation given the tightness of the labour market.  It’s also difficult for the BoE given the large amount of Brexit uncertainty. GBP risks remain to the downside over the short term especially given the heightening political noise in the UK.  The Norges Bank is likely to stand out amongst the crowd, with a rate hike expected, its second in just three months.

Elsewhere in Asia I expect no change from Bank Indonesia, BSP in the Philippines, and CBC in Taiwan. Bank Indonesia is edging towards a rate cut amid low inflation and slowing activity, but will likely want to see further signs of IDR stability before pulling the trigger to begin reversing the 175bp of hikes implemented in 2018.

Weaker activity in Taiwan calls for some sort of stimulus but the reality is that a rate cut will do little to alleviate the pain given that much of the problem is due to external factors.  Instead much of the adjustment may take place on the currency front.

I expect the BSP in the Philippines to maintain its overnight borrowing rate at 4.50% at this week’s meeting while signalling more RRR cuts ahead. Although CPI came in above expectations in May, at 3.2% y/y, it remains close to the midpoint of the BSP’s 2-4% band and I don’t expect it to stand in the way of further easing, but think BSP may wait until at least August to move again.

 

 

Posted in Asia, Asian currencies, Bank of Japan, central banks, Currencies, Economics, Economy, emerging markets, Federal Reserve, FX, Indonesia, Interest rates, Monetary Policy, Philippines, Taiwan, Trade, UK, US. Tags: , , , , , , . Leave a Comment »

Brexit – What next?

May 30, 2019 — Mitul Kotecha

The drubbing that the main UK political parties (Conservatives and Labour) received in the European elections highlights the increasing polarisation of UK politics.  Both took a fudged view on how to go about Brexit while the remainers including the Lib Dems and the hard brexiters led by the newly formed Brexit Part, garnered most votes.  The outcome sends a clear signal of public frustration and impatience at the lack of progress in leaving the EU three years after the Brexit referendum.

A new leader of the Conservative party will likely steer towards a harder Brexit, but this may not resolve the impasse, something that has already brought down Prime Minister Theresa May.  In any case it is unlikely that the EU will want to renegotiate the terms of the Brexit deal agreed with May just because there is a new leader.  Divisions within the Conservative party itself continue to remain stark.  In the meantime Labour leader Corbyn is under pressure to make a clearer shift towards remaining in the EU.

Parliament meanwhile, has already voted against allowing a hard Brexit, suggesting that it is going to be extremely difficult to deliver a no deal or hard Brexit without fresh general elections.  However, as the European elections have shown, fresh UK general elections would spell doom for both the Conservatives and Labour unless they moved to harder stances on either side of the spectrum.  The Conservatives may not risk such an outcome.

This leaves a second referendum as an increasingly viable option, one which would put the question of remaining or a hard Brexit back to the public and out of the hands of parliament.  Indeed given the lack of alternatives and inability of parliament to move forward on Brexit, this may turn out to be the most prescient option although this runs risks of its own including fuelling demands for a fresh Scottish referendum.

GBP has continued to slide amid a clear lack of progress among politicians to arrive at a viable Brexit strategy and increasing risks of a hard Brexit.  However, if markets see a growing chance of a fresh referendum, GBPUSD could reverse some of its recent losses as remain hopes are rekindled, possibly breaking back above 1.30 at the least.   It is not by any means clear that remainers would win such a referendum, but at least they would have a chance that did not exist previously and that could be sufficient to give GBP a bounce.

Posted in Brexit, Currencies, Economics, Economy, Europe, eurozone, FX, Trade, UK. Tags: , , . 1 Comment »

Awaiting More US Tariffs And China Retaliation

May 13, 2019 — Mitul Kotecha

Weekend developments in the trade war included China’s denial that they had reneged on any prior agreements, contrary to what the US administration has said as a rationale for ratcheting up tariffs on China.  In fact, China’s vice-minister Liu He said that such changes (to the draft) were “natural”.  He also said the remaining differences were “matters of principle”,  which implies that China will not make concessions on such some key structural issues.  This does not bode well for a quick agreement.

Meanwhile Trump’s economic advisor Larry Kudlow suggested that Trump and China’s President Xi could meet at the G20 meeting at the end of June. This offers a glimmer of hope but in reality such a meeting would achieve little without any agreement on substantive issues, which appears a long way off.  Markets now await details from the US administration on tariffs on a further $325bn of Chinese exports to the US effectively covering all Chinese exports to the US.

China has promised retaliation and we could see them outline further tariffs on US exports in the next couple of days as well as the possible introduction of non-tariff barriers, making life harder for US companies in China.  The bottom line is that any deal now seems far off while the risk of further escalation on both sides has risen.  Global markets are increasingly taking fright as a result, especially emerging market assets.

There are no further negotiations scheduled between the US and China though Kudlow has said that China has invited Treasury Secretary Mnuchin and trade representative Lighthizer to Beijing for further talks.  Given that Trump now appears to have a unified administration as well as many Republicans and Democrats behind him while China is digging its heels in this, don’t expect a resolution anytime soon.

China’s currency CNY is facing growing pressure as the US-China trade war escalates.   The CNY CFETS index has weakened by around 1% in just over a week (ie CNY has depreciated relative to its trading partners) and is now at its weakest since 20 Feb 19.  While not weaponising the currency, there’s every chance that China will manage CNY depreciation to help compensate Chinese exporters for the pressure faced from higher tariffs (as appeared to take place last summer). Expect more pain ahead.

Posted in Asia, Asian currencies, China, Currencies, Economics, Economy, emerging markets, Trump, US, US administration. Tags: , , , , , , , , . 1 Comment »

‘Beautiful’ Letter Fails To Stop Tariffs

May 10, 2019 — Mitul Kotecha

At 12.01 EST the US escalated tariffs on China, following up on US President Trump’s tweets last weekend.  The tariffs escalation follows what the US administration says was backtracking by China on a number of structural issues in an earlier draft of a trade agreement.   Markets had been nervously anticipating this escalation all week, but also hoping that it could be avoided in some way.

A day of talks in Washington between Chinese officials led by Chinese vice-minister Liu He and US officials including US Trade Representative Lighthizer and Treasury Secretary Mnuchin failed to lead to any agreements or even any sign of progress despite President’s Trump’s tweeting that he received a “beautiful” letter from Chinese President Xi.

Talks are set to resume later but chances of any breakthrough appear slim.  China appears to have taken a harder line on subordinating to some of the US demands for structural changes and don’t appear to have been too phased by the increase in US tariffs on $200bn of Chinese goods from 10 to 25%.  The US side on the other hand appear to be taking a tough stance emboldened by the strength of the economy.

China has vowed retaliation but at the time of writing has not outlined any plans for any reciprocal tariffs.  Trump has also stated that the US is preparing to levy 25% on tariffs on a further $325bn of Chinese goods though this could take some weeks to roll out.  China does not however, appear unduly worried about talks extending further and may be content to play a waiting game.

Market reaction in Asia has been muted today and Chinese stocks have actually registered strong gains, reportedly due active buying by state backed funds, while the Chinese currency, CNY has registered gains.  The USD in contrast has been under broad pressure.

Overall however, markets will end the week bruised and in poor shape going into next week unless something major emerges from the last day of talks.   The CNY meanwhile, could end up weakening more sharply in the weeks ahead, acting as a shock absorber to the impact of higher tariffs on Chinese exports.

For more on this topic I will be appearing on CNBC Asia at 8.00am (Singapore Time) on Monday morning.

Posted in Asia, Asian currencies, China, Economics, Economy, emerging markets, equity markets, Trump, US, US administration. Tags: , , . 1 Comment »

Firm China data boosts sentiment

April 15, 2019 — Mitul Kotecha

It is turning into a solid start to the week for global equity markets and risk assets in general.  Growth concerns are easing and central banks globally have shelved plans to tighten policy.  Comments over the weekend that finance chiefs and central bank stand ready to “act promptly” to support growth, may also reassure markets. Meanwhile, it appears that the US and China are closing in on a trade deal, with US Treasury Secretary Mnuchin stating that enforcement mechanisms could work “in both directions”, potentially easing disagreement on of the contentious issues between the two countries.

In terms of data and events, US Q1 earnings, US March retail sales and industrial production, will be in focus this week alongside more Chinese growth data, elections in Indonesia and the second phase of elections in India.  In Europe, flash purchasing managers’ indices (PMI) for April will give some indication of whether there is any turnaround in growth prospects.  The news will not be particularly good on this front, but the surveys may at least show signs of stabilisation, albeit at weak levels.

China data at the end of last week was particularly supportive, with March aggregate financing, money supply and new yuan loans all beating expectations.  The data add to other evidence of a bounce back in activity in March, with the official manufacturing purchasing managers index (PMI) moving back into expansion territory.   The data comes off a low base after weakness in January and February, but suggests that Chinese monetary and fiscal stimulus is taking effect, with the economy steering towards a soft landing.

Chinese markets clearly like what they see, with equities maintain their strong year to date rally (The CSI Index is up over 34% year to date) and CNY remaining firm (CNY has been the strongest performing Asian currency versus USD so far this year) though China’s bond market will react less well to signs of growth stabilisation.  Chinese data this week including Q1 GDP, March retail sales and industrial production are set to add further evidence of growth stabilisation, helping to keep the positive market momentum alive.

Posted in Asia, Asian currencies, central banks, China, Currencies, ECB, Economics, Economy, emerging markets, Europe, eurozone, Federal Reserve, India, Indian election, US administration. Tags: , , , , . Leave a Comment »
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