US markets were closed Monday for President's Day. Still, the tone was better, likely underpinned by the PBOC's decision Monday to lower its one-year MLF lending facility by 10bps to 3.15%, its lowest level since 2017.
Chinese measures to help support the economy in the wake of the coronavirus saw onshore Chinese equity markets outperformed yesterday; the CSI 300 was up 2.25% and the Shenzhen composite rose 3.18%. This policy shift helped lifted offshore China proxies – the Hang Seng and China H shares – but had a minimal bearing on other markets. Investors outside of Chinese markets continued to mildly fret about supply chains and demand contraction, two channels which are difficult to assess.
This morning's latest Apple quarterly guidance did little to arrest those concerns, as the report suggests that due to the Covid19 knock-on effects, "worldwide iPhone supply is temporarily constrained, though demand remains strong, production is ramping up slower than expected."
Indeed, the market's ability to look through these types of short-term supply chain concerns will likely guide short term momentum. Mind you, investors have shown remarkable resilience to look through just about everything that’s been thrown at them of late.
Still, Apple is one of the growth leadership stocks which has been driving the markets higher in part due to the Fed repo remedies. So, the tricky question is "does one bad Apple spoil the whole bunch?"
Mainland equities have now retraced losses, SHCOMP’s significant gains yesterday are taking prices back to pre-coronavirus levels and now the aftershock remains in EUR, commodity complex and the tourist parts of EM Asia. However, going forward, it isn't so effortless to see a big push into the "Rest of Asia" assets unless growth very quickly surprises to the upside.
Still, this might not stop investors from trying to front-run the manufacturing rebound trade.
It's a tricky market environment; there isn't intemperate fear, nor is there unreasonable optimism. While the virus stories don't carry the same headline gravitas, it's still a focal point, but the economic data concerns continue to simmer on the back burner. Korea's 20-day exports on February 21 is the first data point barometer of how the month is panning out. It will be an essential test of investors' resolve, given some positioned for a post-coronavirus manufacturing rebound.
News flow around Covid-19 hasn't significantly improved but crude markets have normalized in reacting to it, while a significant hit to demand 1Q appears priced into the scrim. That's assuming Russia plays ball of course, with the JTC production cut remedies.
While the long-term implication of the outbreak remains uncertain, the immediate impact on productivity is becoming apparent; 1) the decision to extend the CNY holiday, 2) transport restrictions and 3) mandatory 14- day quarantine for returning workers will be an obvious impediment to crude prices. But how correctly the market has priced in these concerns is the burning question.
While it’s more comfortable to call oil higher, given the likely pent-up demand to lead to a recovery from Q2, it's far too early to suggest oil market concerns have dissipated.
The US rig count showed a +2 rise in oil rigs. Still, we’re not seeing the average 1Q growth we might typically expect, which is alleviating oversupply concerns a touch – but this is understandable given the pressure on E&P cash flows and the lower price.
Any glean of a sell-off in stock markets due to the Covid 19 knock-on effects will continue to drive gold demand higher as the bias to be hedged long gold in the current environment remains enduring. This morning Apple downgraded forward guidance due to Covid19 concerns and has provided that fillip to gold prices this morning as risk-on sentiment has soured precipitously.
While gold's negative correlation with equities suggests that investors remain quite sensitive to fluctuations in risk sentiment, gold is very much on everyone's radar. This suggests bids will stay firm on dips to $,1575-65 levels – even more so as there are now more cuts priced for the Fed than any other central bank as Friday's core US retail sales data does raise questions over core consumption in the US. And while Fed members have been quick to play up the strength of US consumption, the trend appears to be weakening and the markets continue to price in Fed rate cuts into the summer: bullish for gold.
Even though coronavirus risk premia are reducing and vols are taming, there's a gigantic swath of economic carnage left in the Covid-19 wake. So even with Hubei province now reporting fewer infections, with Korea's 20-day exports on February 21, the first data point barometer of how the month is panning out, Asia FX optimism could weigh on local risk today.
Still, on moves to USDCNH 7.0 and correlated proxy gaps, investors will be looking for a buying Asia FX opportunity but could remain cautious about adding more currency risk before assessing the depth of the economic fallout. But with regional policymakers taking protractive and actionable measures to thwart of the legacy effects of Covid-19, this should be viewed as growth positive. But unless growth very quickly surprises to the upside (which I don't expect) Asia FX risk is probably best expressed through Asia FX higher yielders at the moment.
The Malaysian Ringgit
With the Yuan backing up this morning, suggesting investors need to get a better look into regional economic data to make sure growth carnage is not worse than expected, the Ringgit could struggle for traction today. But the biggest issue for the Ringgit very much relies on a pickup in growth expectations to recover sustainably and that growth spurt might not occur until Q2.
The Singapore Dollar
The SGX forwards market is unusually quiet ahead of today's budget release (1500 SGT). The curve is either "bid without" or drive a truck through the spread. The lack of bid side liquidity along the curve suggests that locals are cautiously optimistic about a significantly large budget delivery, which could see the 6m-1y SGD FX get smashed if that comes to fruition.
The EURUSD is still trading at the lows of the latest sell-off and struggling to recover. Price action is telling, and the consensus is more and more for a lower EURUSD; positions are accordingly. CFTC data is its most bearish since June 2019 and risk reversals most in favor of puts since September 2019. But with the market adequately positioned for a move lower, the risk of a short squeeze looms the longer it takes to break through 1.0800.
Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies