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.

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

US Elections Take Yet More Twists & Turns

October 4, 2020 — Mitul Kotecha

Amidst mixed messages from the White House about President’s Trump’s health and a growing circle of US administration officials and Senate Republicans infected with Covid-19, markets will kick of this week with many questions about the running of government, prospects for fresh fiscal stimulus and the nomination of the new Supreme Court Justice. President Trump pushed for stimulus in tweet while in hospital but obstacles in the Senate remain, including the fact that the Senate has adjourned until Oct 19, a factor that will also delay the Supreme Court confirmation process. 

In what was already an election fraught with various issues, President Trump’s Covid infection has added another layer of uncertainty.  The fact that several of his campaign aides have tested positive also complicates his ability to campaign to try to close the gap with ex- VP Biden.  There is also the question of whether the President will be well enough to take part in the second Presidential debate scheduled for October 15.  Markets initial sharp negative reaction to the news that Trump had contracted the virus, on Friday was tempered by the end of the session suggesting some calm.  However, every piece of news on Trump’s health will be closely scrutinized in the days ahead.  

The US dollar ended last week firm and this trend is likely to continue given the uncertainty about events in the weeks ahead, which despite the fact that much of this uncertainty is US led, will still likely lead to some safe haven dollar demand. 

A weaker than consensus US September jobs report didn’t help markets at the end of last week, with non-farm payrolls coming at 661k (consensus 859k) while a 0.5% drop in the unemployment rate was due a drop in the participation rate.  US non-farm payrolls are still down 10.7 million from the levels seen in February, highlighting the still significant pressure on the US labour market despite the job gains over recent months. 

Attention this week will focus on Federal Reserve Chair Powell’s speech on Tuesday and Fed FOMC minutes on Wednesday, which will be scrutinised for details on how the Fed will implement average inflation targeting.  Also on tap is the US Vice Presidential debate on Wed between Mike Pence and Senator Kamala Harris, which hopefully will not be a fractious as the debate between President Trump and ex-Vice President Biden.  

Monetary Policy rate decisions in Australia (consensus 0.25%) on Tuesday and in Poland (consensus 0.1%) on Wednesday as well as the Australian Federal budget on Tuesday will also garner attention this week. 

Posted in Australia, central banks, coronavirus, COVID-19, Currencies, Economics, Economy, Federal Reserve, Fiscal/Budget, FX, Interest rates, Monetary Policy, Politics, Trump, US, US administration. Tags: , , , , , , , , , , , , , . Leave a Comment »

Lingering Disappointment

September 20, 2020 — Mitul Kotecha

Another soft close to US stock markets at the end of last week sets up for a nervous start to the week ahead.  The S&P 500 has now declined for a third straight week, with tech stocks leading the way lower as more froth is blown way from the multi-month run up in these stocks.  Lingering disappointment in the wake of the Federal Reserve FOMC meeting is one factor that has weighed on risk assets.  More details on how the Fed plans to implement its new policy on average inflation targeting will be sought. Markets will also look to see whether the Fed is pondering any changes to its Quantitative Easing program. This week Fed officials will get the opportunity to elaborate on their views, with several Fed speeches in the pipeline including three appearances by Fed Chair Powell. 

Disappointment on monetary policy can be matched with a lack of progress on the fiscal front, with hopes of an agreement on Phase 4 fiscal stimulus ahead of US elections fading rapidly.  A loss of momentum in US economic activity as reflected in the NY Fed’s weekly economic index and declining positive data surprises as reflected in the Citi Economic Surprise Index, are beginning to show that the need for fresh stimulus is growing.  On the political front, the situation has become even more tense ahead of elections; following the death of Supreme Court justice Ruth Bader Ginsburg attention this week will focus on President Trump’s pick to replace her, adding another twist to the battle between Democrats and Republicans ahead of the election.    

Another major focal point ahead of elections is US-China tensions, which continue to simmer away. China’s economy and currency continue to outperform even as tensions mount.  August’s slate of Chinese data were upbeat and China’s currency (CNY) is increasingly reflecting positive economic momentum, with the CNY CFETS trade weighted index rising to multi week highs.  There is every chance that tensions will only get worse ahead of US elections, likely as the US maintains a tough approach in the weeks ahead but so far Chinese and Asian markets in general are not reacting too much.  This may change if as is likely, tensions worsen further. 

After last week’s heavy slate of central bank meetings, this week is also going to see many central banks deliberate on monetary policy.  The week kicks off with China’s Loan Prime Rate announcement (Mon), followed by policy decisions in Hungary and Sweden (both Tue), New Zealand, Thailand, Norway (all on Wed), and Turkey (Thu).  Markets expect all of the central banks above to keep policy unchanged as was the case with the many central banks announcing policy decisions last week.  The lack of central bank action adds further evidence that 1) growth is starting to improve in many countries and 2) the limits of conventional policy are being reached.  While renewed rounds of virus infections threaten the recovery process much of the onus on policy action is now on the fiscal front. 

Posted in Asia, Asian currencies, central banks, China, coronavirus, COVID-19, Currencies, Economics, Economy, emerging markets, equity markets, Federal Reserve, Financial crisis, Fiscal/Budget, FX, Interest rates, Monetary Policy, New Zealand, Norway, Politics, Thailand, Trade, Trump, Turkey, US, US administration. Tags: , , , , , , , , , , , , , , , , . Leave a Comment »

US/China – The Gloves Are Off

August 16, 2020 — Mitul Kotecha

The delay in the Phase 1 trade deal review (initially slated for Sat 15 Aug) will come as a disappointment though it was reported that it did not reflect any substantive problem with the trade deal, but rather to give China more time to increase purchases of US goods.  China’s reported desire to include TikToK and WeChat restrictions to the discussions may have also played a part.  The Phase 1 review delay followed by President Trump’s order for ByteDance to divest TikTok’s US operations within 90 days and ending of a waiver allowing US companies to continue selling goods to Huawei, ratchets up tensions another notch.

It is abundantly clear that ahead of US elections in November the gloves have come off.  More is yet come and next steps may involve sanctions against more Chinese companies and eventually even Chinese banks.  China’s reaction continues to be measured, which suggests the broader impact on risk appetite will remain contained for now.  China wants to retain foreign investment and has continued to enact measures to open up to such investment.  Reciprocating sanctions on US companies in China would go against this path and seems unlikely to take place unless tensions worsen further.

However, it is not clear that China’s actions will remain measured. The US administration is set on pushing more sanctions on Chinese individuals and companies in what has become a whole of government approach. This is something that has broad based bipartisan support within the electorate.  The risk of crossing certain red lines, perhaps (though still unlikely as Trump sees this as a key success of his Presidency) by scrapping Phase 1 or perhaps by sanctioning Chinese banks by cutting them out of the USD liquidity and payments system and/or by some sort of military escalation in the South China Sea, could yet lead to a much more significant reaction from China and a more severe impact on global markets.

The likely path however, is that the US administration will try to keep Phase 1 alive even as China is far behind its targets on imports of US goods; according to PIIE through the first 6 months of the year China’s purchases of US goods were 39% (US exports data) or 48% (Chinese imports data) of their year-to-date targets.  Given the gap, in part due to Covid, but also due to initially ambitious targets, the delay in the Phase review should not be a big surprise.  The US may be wiling to give China some room to try to move towards reaching its targets, but the gap will not be easy to bridge.  Regardless, US/China tensions will be an ever present part of the landscape in the months ahead of US elections and markets may not remain as sanguine as they have been so far.

Posted in Asia, Asian currencies, China, coronavirus, COVID-19, Currencies, Economics, emerging markets, equity markets, FX, Hong Kong, Politics, Trade, Trump, US, US administration. Tags: , , , , , , , , . Leave a Comment »

Revoking Hong Kong’s Special Status – Data/Events This Week.

May 31, 2020 — Mitul Kotecha

In a further escalation of US-China tensions, President Trump revoked Hong Kong’s (HK) “Special Status” as revealed in a speech on Friday.  What does this mean? At this stage there is scant detail to go on.  Trump also promised to implement sanctions against individuals in China and HK who he deems responsible for eroding HK’s autonomy, but no names were given. Markets reacted with relief, with US equities closing higher on Friday, perhaps in relief that that the measures outlined by Trump were not more severe, or that the lack of detail meant that there could be various exemptions.

On the face of it, removing Hong Kong’s “Special Status” would deal a heavy blow to Hong Kong’s economy and to US companies there, while hurting China’s economy too.  However, while still an important financial centre, Hong Kong’s economy relative to China is far smaller than it was at the time of the handover in 1997, at around 3%.   As such, removing Hong Kong’s “Special Status” could be less painful on China than it would have been in the past.  This may explain why the US administration is focusing on other measures such as student visa restrictions, sanctioning individuals, restricting investment etc.  Even so, tensions will continue to cast a shadow over markets for some time to come and will likely heat up ahead of US elections in November.

Data wise, the week began with the release of China’s May manufacturing and non-manufacturing purchasing manager’s indices (PMIs) today.  The data revealed a slight softening in the manufacturing PMI to 50.6 in May from 50.8 in April, indicating that manufacturing activity continues to remain in expansion.  However, the trade related components were weak, suggesting that China’s exports and imports outlook is likely to come under growing pressure, weighing on overall recovery.  China’s currency, the renminbi, has been weakening lately against the US dollar and against its peers, though it rallied against the dollar on Friday.  Further gradual weakness in the renminbi looks likely over coming weeks.

This week there will be attention on various data releases and events including US May jobs data, ISM manufacturing, European Central Bank (ECB) and Reserve Bank of Australia (RBA) policy decisions and UK-EU Brexit discussions.  Of course markets will remain tuned into Covid-19 developments as economies around the world continue to open up.   While the US jobs and ISM data will likely remain very weak, the silver lining is that the extent of weakness is likely to lessen in the months ahead.  Consensus forecasts predict a massive 8 million drop in US non-farm payrolls and the unemployment rate to increase to close to 20%.  The RBA is likely to leave policy unchanged at 0.25% while the ECB is expected to step up its asset purchases. Meanwhile UK-EU Brexit discussions are likely to continue to be fraught with difficulty.

 

 

 

Posted in Asia, Australia, Brexit, central banks, China, coronavirus, COVID-19, Currencies, ECB, Economics, Economy, emerging markets, equity markets, Europe, eurozone, FX, Hong Kong, Interest rates, Monetary Policy, Trade, Trump, UK, US, US administration. Tags: , , , , , , , , , , . Leave a Comment »
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