Monday, February 3, 2020

Capital Markets: "Inauspicious Start to the Year of the (Flying) Rat"

From Marc To Market: The Year of the Rat is off to an inauspicious start as apparently a fly rat (a bat) virus has jumped to humans. China's markets re-opening amid much fanfare, and the Shanghai Composite dropped 7.7%, which is about what the futures in Singapore had anticipated. Several other markets in the region (Japan's Nikkei, Australia, Singapore, Taiwan, and Thailand) fell by more than 1%. However, European and US shares are edging higher, and other measures of safe-haven buying are relaxing. US Treasury yields are up a couple of basis points, and European bonds are also narrowly mixed. Gold is around $10 lower, giving back the lion's share of the pre-weekend gain. Oil prices have recovered from the earlier drop that saw the March WTI contract fall to a little below $50.50 before rebounding. The dollar is mostly higher. Against the majors, the Australian dollar, which had been beaten up last week, seemingly as a proxy for China's whose markets were closed, has managed to hold its own against the greenback. Sterling, which had been a big winner into month-end, is seeing those gains unwound. Most emerging market currencies are lower as well, paced by the onshore yuan that fell by 1.1%.

Asia Pacific
Even before China's markets opened today, officials were offering liquidity and credit support. Banks were also urged to be flexible with businesses and be prepared to lend. The focus is on emergency liquidity and disaster relief. Using the power of moral suasion in the way that officials do, short-selling was discouraged. China injected CNY1.2 trillion ($175 bln) into the banking system, which included CNY150 bln ($22 bln) new funds. Rates were cut by 10 bp, but the new benchmark, the Loan Prime Rate is not set until February 20. Separately, China is dramatically increasing meat imports, according to the Commerce Ministry. To the extent that beef and pork are processed grains (corn and soy), importing meat is more efficient. For the record, though obviously dated, the Caixin manufacturing PMI reportedly fell to 51.1 from 51.5. More telling, corporate profits in December fell 6.3% year-over-year, pointing to the economic challenges prior to the coronavirus.

Japan's January manufacturing PMI was revised lower
from the flash reading of 49.3. Its final estimate was 48.8, which is still above the 48.4 of November. Japan also reported January auto sales fell 11.1% from year-ago levels. It was the fourth consecutive year-over-year decline and warns that Japan continues to feel the impact of the sales tax increase.

The Reserve Bank of Australia meets tomorrow. The manufacturing PMIs moved in opposite directions. The AiG version fell to 45.4 from 48.3, while the CBA version rose to 49.6 from 49.1. Separately, December building approvals slipped but less than expected (-0.2% rather than 5% than economists forecast, and the November series was revised to 10.9% from 11.8%). While the market favors a standpat stance, it is only temporary, and a rate cut is fully discounted in Q2....

Also at Marc to Market:

February Monthly