Firm China data boosts sentiment

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.

ECB meeting, Brexit, Fed minutes, China trade, India elections in focus

This week there a number of key events to focus attention on including European Central Bank (ECB) policy meeting, Federal Reserve FOMC March minutes, the commencement of India’s general elections, China data, and further Brexit developments as UK Prime Minister May tries to gain a further short extension to the Brexit deadline, until June 30.

The better than expected US March jobs report, revealing a bigger than expected 196k increase in jobs, with a softer than expected 0.1% monthly increase in hourly earnings, which effectively revealed a firm jobs market, without major wage pressures, helped US markets close off the week on a positive note. The data adds to further evidence that the Fed may not need to hike policy rates further.

The European Central Bank decision is likely to prove uneventful though recent comments by ECB President Draghi have fuelled speculation that the central bank will introduce a tiered deposit system to alleviate the impact of negative rates on banks.   EUR is unlikely to benefit from this.  Separately Fed FOMC minutes will be scrutinised to ascertain how dovish the Fed has become as the markets shift towards pricing in rate cuts, but it is unlikely that the minutes provide further fuel to interest rate doves.

Friday is the deadline to agree on an extension with the EU to prevent a hard Brexit.  Meanwhile PM May is set to restart talks with opposition Labour Party leader Corbyn to thrash out a cross party agreement on Brexit terms ahead of an EU summit on Wednesday that will look at her request for a Brexit extension until June 30.  GBP has lost momentum lately and investors appear to be fatigued with the daily Brexit news gyrations.

Meanwhile, US-China trade talks appear to be edging towards some sort of a deal while Chinese data this week is also likely to be supportive for risk assets.   As China eases financing conditions, evidence of a pick up in the credit impulse will be evident in March aggregate financing, new loans and money supply data this week.   Meanwhile China’s March trade data is likely to look better or at least less negative than over recent months. This suggests that risk assets will likely fare well this week.

India will be in the spotlight as India’s multi stage elections kick off on Thursday.  Prime Minister Modi is in good stead to ahead of elections, boosted by his government’s reaction to recent terrorist attacks on Indian paramilitary in Kashmir.   Concerns that Modi’s ruling BJP would lose a significant amount of seats in the wake of state election losses towards the end of last year have receded.  Nonetheless, election uncertainties may keep the INR on the backfoot this week.

RBI Governor Patel’s resignation hits India’s markets

Reserve Bank of India (RBI) governor Patel resigned yesterday in a surprise move.  Patel cited “personal reasons” but it is likely to have much to do with tensions between the government and RBI.  Although it had appeared they had reached a compromise, it appears that Patel didn’t feel that the RBI came out of it well. Patel’s resignation came just ahead of a RBI board meeting on Friday, and has hit India’s markets.

The timing is not good.  Patel’s resignation comes just ahead of the release of five state election results today, with Madhya Pradesh, Rajasthan, Chhattisgarh, Telangana and Mizoram, all having gone to the polls. Exit polls have suggested a weaker showing for PM Modi’s BJP, with Madhya Pradesh and Rajasthan likely to deliver blows to the BJP.  The outcome of the elections will be scrutinised for clued ahead of next year’s general elections.

Issues such as dealing with non-bank financial companies (NBFCs), implementation of the Insolvency and Bankruptcy code and even interest rate setting, have all been under scrutiny over recent months. How to deal with tightening liquidity has been a source of contention, with the government wanting the RBI to do more to ease liquidity and lending conditions. The RBI pushed back against the government’s request for a
higher payout from central bank reserves.

Although the government has not yet announced a replacement to Patel it will clearly be important that whoever it is, will be seen as independent of the government. The RBI under Patel has been seen to be overly hawkish by some and in this respect the government may be able to install someone who is more open to easing both monetary policy and lending constraints.The next steps will be important.

If the government nominates someone to replace Patel who is seen as more susceptible to political influence it could have much further and deeper negative consequences for India’s markets.  If however, the government is seen to nominate someone who can maintain the independence of the RBI it will bode well for confidence in Indian assets.

India braced for a new era under Modi

Dear readers, it’s been a long while since I wrote a blog post and I must apologize for their absence. I have left my job at Credit Agricole CIB and will be moving from Hong Kong to Singapore to work for another bank. I am currently on gardening leave and am therefore not following market developments anywhere near as closely as I was until I start my new job at the end of June. Nonetheless, given the major events in India over recent days, with the victory of Narendra Modi and his Bharatiya Janata Party (BJP) in general elections, I felt compelled to write something.

Firstly the fact that the BJP won a landslide victory with 282 seats out of a total of 543 ensures that for the first time in decades the government in India does not have to be encumbered by a wide range of political beliefs and views. The consequent inaction a wide ranging coalition would have entailed would lead to renewed policy paralysis. As it is the BJP can form a majority government, with Modi able to emulate the successful reform policies he implemented in his home state of Gujarat while he was Chief Minister there. Being a Gujarati I can’t help but be caught up in the euphoria of what this could mean for India.

In contrast the Congress party and its leaders from the Nehru/Ghandi dynasty suffered a massive defeat, not only throwing them into opposition but shoving them to the margins in terms of political strength. Admittedly there has been a lot of money that has poured into Indian stocks and bonds over recent months but this does not necessarily mean that a BJP majority was priced in. On my last visit to India many of the clients I met actually thought that Modi may have been ousted while it was not felt that he and the BJP would be able to gain an outright majority. In the event he proved doubters wrong. In other words there is still plenty of scope for upside for the rupee and Indian stocks and bonds.

Now before we all get too excited a dose of reality needs to be brought into the mix. The “Gujarat model” was one of rapid improvements in infrastructure, reduction in bureaucracy and red tape and an encouragement of foreign investment. Clearly nothing in India is going to change overnight and adapting the model implemented in Gujarat, a state of 60 million people, to a country of over 1 billion people will not be easy. There will also be risks in terms of social tensions given the more right wing views of Modi and his party. Nonetheless, the strong mandate given to Modi by the electorate was for tough reform and this is what Modi and his style of government is best at.

There is little to time for a Modi honeymoon. The country’s bloated fiscal deficit, persistent current account deficits, elevated inflation, high indebtedness in some sectors, job market rigidities, inconsistent tax policy and masses of red tape and corruption, are only a few of the issues to contend with in a country with a wide spectrum of socio economic standing and religious views. Modi may also have to show some new secular credentials to ensure that his policies do not fuel sectarian tensions, something that may not come easy.

The hope among Indians and foreign investors is that Modi can once again push the economy back onto its fight and move to growth rates closer to 8-9% rather than 4-5% that the country under Congress rule has settled into. The selection of officials especially the Finance Minister will give important policy clues while ensuring that the well regarded central bank governor Rajan retains his post will help solidify confidence. Having been disappointed so many times in the past it is tough not to be skeptical but it may finally be time to throw caution to the wind and give Modi the benefit of the doubt. If anyone is up to the job it appears that Modi has the right credentials for it.

My Interview on Reuters / ET Now

Watch my interview on Reuters / ETNOW. Click on the link below

videoId=276730253&videoChannel=104″>http://in.reuters.com/video/2014/02/06/need-reform-oriented-government-in-india?videoId=276730253&videoChannel=104

“Mitul Kotecha, head of global markets research Asia & FX strategy at Credit Agricole CIB, is more optimistic on emerging markets than before but sees risk aversion among investors in EM equities. He tells ET NOW, investors are awaiting the election outcome and says it’s essential a reform-oriented government comes to power.”

Is the Asian FX rally losing steam?

Asian currencies appear to have lost some of their upward momentum over recent days.  Although the outlook remains positive further out, they are likely to struggle to make further gains over coming weeks.  One the one hand strong inflows into Asian equity markets have given support to currencies but on the other hand, data releases reveal only a gradual economic recovery is taking place, with continued pressure on the trade front as seen in the weakness in recent export data in the region.  Even China has been cautious about the prospects of recovery in the country.   

Almost all currencies in Asia have recouped their losses against the US dollar so far this year, with the Indonesian rupiah the star performer, having strengthened by over 11% since the start of the year.  More recently the Indian rupee has taken up the mantle of best performer, strengthening sharply following the positive outcome of recent elections.  The rupee has strengthened by around 3.5% since the beginning of the year and its appreciation has accelerated post elections.   

Much of the gain in the rupee can be attributable to the $4.4 billion of inflows into local equity markets over the last few months, a far superior performance to last year when India registered persistent outflows. Notably in this respect, the Philippines peso is set to struggle as foreign flows into local equities lag far behind other countries in the region.  Inflows into Phililipines stocks have been just $226 million year-to-date as fiscal concerns weigh on foreign investor sentiment.   

South Korea has been the clear winner in terms of equity capital inflows in 2009, with over $6 billion of foreign money entering into the Korean stock market.  Elsewhere, Taiwan has benefited from the prospects of growing investment flows from China and in turn equity market inflows have risen to around $4.3 billion supported by news such as the recent report  that Taiwan will allow mainland Chinese investors to invest in 100 industries.  Equity inflows into these currencies are far stronger than over the same period in 2008, highlighting the massive shift in sentiment towards Asia and emerging markets in general.

Unsurprisingly stock markets in Asia have been highly correlated with regional currencies over recent months, with almost all currencies in Asia registering a strong directional relationship with their respective equity markets.  Recent strong gains in equities have boosted currencies but this relationship reveals the vulnerability of currencies in the region to any set back in equities, which I believe could come from a reassessment of the market’s bullish expectations for Asian recovery.  

Central banks in the region have been acting to prevent a further rapid strengthening in Asian currencies by intervening in FX markets but a turn in equity markets and/or risk appetite could do the job for them and result in a quick shift in sentiment away from regional currencies. The Indonesian rupiah remains one to watch in terms of further upside potential, supported by the Asian Development Bank’s $1bn loan to Indonesia.   The outlook for the Indian rupee also looks favourable as post election euphoria continues.  Nonetheless, the gains in these and other Asian currencies have been significant and rapid and I believe there is scope for a pull back or at least consolidation in the weeks ahead.

Will India remain in the shadows?

Indian markets rejoiced in a big way following the outcome of the elections which put the secular Congress party back into power as the head of the United Progressive Alliance.   Stocks in India rose by a massive 17% and the rupee strengthened as markets gave a huge thumbs up to the outcome.   The margin of victory was bigger than had been expected and allows Congress to form a government with only minimal help from outside parties.  

Given that many had feared that the election would result in another unstable coalition supported by diverse parties each acting in their own interests,  the outcome was very positive.  In the event the result provides Congress with a strong mandate for change and reform.  The real question is whether they will grasp the opportunity or let it slip by and fall further behind into the shadow of China. 

There are of course many challenges that need to be faced on the home front including the alleviation of poverty for a huge chunk of the population, improving education, access to health care etc.   India also needs to move ahead with infrastructure spending, something which remains key to unlocking India’s potential growth and moving towards the pace of growth achieved by China.    As a comparison India spends around 6% of GDP on infrastructure spending compared to around 15% in China.   The results of such spending are obvious when looking at the pace of growth of both countries, with India growing relatively more slowly than China.

The issue is that even if the government has the mandate and the will to move forward with long awaited spending on infrastrucure, finding the money is the main problem.   The Indian government identified the need for $500 billion in infrastructure spending between 2007 and 2012 but the global financial crisis has seen a lot of potential investment disappear as banks bec0me increasingly strapped for cash and foreign investment shrinks due to lack of funding and an aversion to risk.   Restrictions on investments by funds that could potentially invest have also not helped whilst the government is limited in its spending by a huge fiscal deficit.    

The Congress party will need to grasp the opportunity that the election result has brought it and move forward to entice the investment needed to push forward with infrastructure plans.   One of the benefits of India’s slow pace of reform and gradual opening up of the economy is that the country has avoided the worst of the global economic crisis.  Even China will find it a huge challenge to shift its growth engine from export orientated growth to domestic consumption.  India is in a good position to take advantage of its relative resilience and now has a government with a strong mandate to do so.    It would be a great pity for India and the rest of the world, given the potential for the country to become a much stronger trading power, if the government did not take this opportunity by the horns once the celebrations are over.   If not, the rally in Indian markets may prove to have been a fleeting one.

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