India’s Covid Worsening, Central Banks and US Data

A number of holidays this week points to quieter week for markets.  However, as I note below, there are still a number of risk events on the horizon. 

A growing focus is the divergent trend in the path of Covid in emerging markets and in developed economies, with the former especially in some parts of Asia, Latin America and Africa, seeing a significant worsening, which will likely result in delayed recoveries and lead to some EM asset market underperformance. 

India’s Covid situation worsens dramatically

As all the headlines show, India’s Covid situation has become particularly dire though a lack of large-scale lockdowns has led to only a limited mark down in growth forecasts there even as risks intensify.  Already there has been a political cost, with Indian PM Modi’s BJP party losing a key state election in West Bengal and losing ground in other state elections.  Virus cases are still on the rise and sadly the picture will worsen before there are any signs of improvement.  

Covid cases in India have been trending higher since February and hit record highs this weekend, above 400,000. The number of cases is approaching 20 million, with over 215k deaths, while the country has administered 157.2 million vaccine doses.  However, at the current rate of vaccination of 2.26 million per day, it will take 2.2 years to cover 75% of the population with a two-dose vaccine. 

US dollar consolidating

After losing ground in April (the USD index DXY fell close to 3% over the month) the US dollar (USD) looks likely to consolidate this month.  USD positioning has already improved over recent months, suggesting limited scope for short covering.  Seasonal factors are unlikely to be particularly influential this month.  However, I am cognizant that cross asset market volatility has eased significantly, while risk assets are already priced for a lot of good news.  Nonetheless, risk factors are increasingly rising, especially increasing Covid cases in many emerging markets as noted above.  This leaves the market prone to bouts of risk aversion, which could result in some bouts of USD strength amid an overall backdrop of consolidation.

Key data and events

This week is an important one for both data and events.  There are several central bank decisions including in Australia (Tue), Thailand and Poland (Wed), Malaysia, UK, Turkey, and Brazil (Thu).  None of the central banks are expected to change policy settings except Brazil, with the consensus looking for a 75bp hike there.  In the UK, there is uncertainty over the future path of QE and whether the Bank of England extends asset purchases or takes the first steps to bringing asset purchases to an end echoing the Bank of Canada by announcing tapering. 

On the data front, the main highlights include the US ISM surveys (today and Wed), US April jobs report (Fri) and China trade data.  Both the US ISM surveys and payrolls are likely to reveal robust readings.  Fiscal stimulus and easing Covid likely helped to boost US jobs growth in April while the unemployment rate likely fell.  Meanwhile the ISM surveys will likely remain around historical highs for similar reasons.  Overall, the data will continue to paint a picture of strengthening US economic recovery. Meanwhile China trade data is likely to reveal strong exports and imports growth, though much of this will likely be due to base effects.

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India Risks, Highlights For The Week Ahead

It was a strong end to last week for US markets, with S&P 500 up over 1%, helped by stronger than expected new home sales and April US Markit purchasing managers indices (PMI) data. As risk assets rallied the US dollar and US Treasuries sold off.  There are plenty of event risks this week. Also, there will be deluge of US earnings releases this week including most tech heavyweights while markets will likely remain nervous over President Biden’s tax plans.  Geopolitical risks will also remain on the forefront. 

Even as the progress on the vaccination front continues the renewed increases in virus cases in many countries, particularly in India, where the situation has deteriorated markedly, threatens to delay recovery. The acceleration in virus cases has been dramatic, with Prime Minister Modi noting how it has “shaken the nation”. Virus cases hit 349,000 on Saturday and show no sign of receding. The toll on the health system in India has been massive, but the variants also holds risks to the rest of the world while it will also lead to a major disruption in India’s vaccine exports, threatening vaccination programs in several countries.  

Friday’s economic data round was broadly firm. Alongside the US releases noted above, Euro area April PMIs were generally better than expected, with G10 manufacturing PMIs pointing to strengthening momentum overall.  Separately, Russia’s central bank, the CBR surprised with a bigger than expected 50bp rate hike.  Today’s data releases include the April German IFO business confidence survey; consensus expectations forecast an increase to 97.8 from 96.6 previously. In the US, durable goods orders are forecast to rise in March by 2.5% m/m following a weather-related 1.2% m/m drop in February.

The focus over the rest of the week will turn to central bank decisions in Japan, Sweden and Hungary (all on Tue) and the Federal Reserve FOMC (Wed).  Although the Bank of Canada’s shift last week will prompt a little more nervousness about G10 central bank tapering the policy meetings are likely to be largely uneventful, this week. Nonetheless, the Fed tone is likely to be more positive than in March, while in contrast the Bank of Japan may sound more cautious amid a third state of emergency in Tokyo. 

A key event this week will be President Biden’s address to a joint session of Congress.  After the hit to markets in the wake of the news of a proposal to hike taxes, markets will look for any further details.  Key data releases this week include Australia Q1 CPI inflation (Wed), US Q1 advance GDP (Thu), China’s April purchasing managers indices data (Fri) and Euro area Q1 GDP (Fri).  

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.

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.

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