In China, the stronger than expected March Total Social Financing should help to set a positive tone this week as Hong Kong and Stock Connect come back online today.
China has approved two new experimental coronavirus vaccines from Sinopharm and Sinovac to enter the clinical trial. The race is on for a cure, which is another good sign and is risk supportive; only when a vaccine is found does life return back to normal.
China trade data was better than the market expected
China March exports were -3.5% y/y vs. -12.8% consensus and imports +2.4% y/y vs. -7.0% consensus; both in yuan terms look good. But the Q1 trade surplus is CNY98.33 bn and the actual trade balance has narrowed significantly.
One of the main reasons for the export beat is due to backlogged orders that Chinese exporters were not able to deliver in February as factories remained shut and mobility restrictions were strictest during that period. But challenges facing Chinese exporters in March were benign; in April, while China production engines are lighting up, primary export markets are not consuming due to lockdown which wasn't as a significant concern in March.
The Australian dollar completely ignored the weak NAB business confidence data as the market is mostly ignoring surveys that require participants to check off a box as the margin of error is too huge.
Local Forex markets are relatively stable this morning. However, there are the usual pockets of interest starting to perk up as risk sentiment improves on the better China trade data.
But the Indonesia Rupiah is one currency that hasn't looked back since the Bank of Indonesia struck a 60 billion repo facility with the FED as Forex reserve. The sudden slow-down in economic activity globally meant countries that used to generate USD revenue to support their USD debt (natural hedges) suddenly need USD funding, and Indonesia was one of those countries in dire need with FX reserves plummeting.
The US dollar trades weaker with cross-asset volatility declining
Still, with Fed's USD funding facilities working their way through the markets, hedging demand should decrease. Even more so as economies like China come back to life, suggesting their proxies who took extreme lockdown measures to contain the virus will soon follow in suit and allow people back to work. But the improved risk tone has also lifted the Euro in the Asia session. The US dollar continues to trade weaker when cross-asset vol is declining.
Oil prices received a small bounce on the trade data, which, as expected, showed China importing more crude as industrial engines turned on and amid reports of China stockpiling. So, this bump is unlikely to stick since it should be priced into the equation.
We know oil demand will probably never return to normal after the COVID-19 crisis. Still, it's about how well this essential asset is managed over time so the global economy can remain in a state of stability.
The objective of the oil deal was not to push prices higher but stop the bleeding and let demand gradually recover over time, keeping supply tight but turning on the taps on a graduated basis. The question is: will this strategy be sufficient to push prices above $40 per barrel in the second half of 2020? The OPEC+ agreement provides for supply restraint to continue through to 2022 – albeit at reduced levels. If you believe that the deal falls apart as prices start to recover in Q3, we’ll get to revisit this argument all over again in September 2020.
Profit-taking has set in after some outsized gains overnight on the back of the better-than-expected China trade data which has lit a fire under risk sentiment.
The easing of the lockdown in Wuhan, the city in China most affected by the coronavirus outbreak, has sent a positive signal that China's measures have been effective in containing the virus and domestic activities are gradually returning to normal. Now the biggest challenge facing Beijing is to prevent the coronavirus from having a long-lasting economic impact.
More than ever, Beijing appears committed to challenging the economic headwinds after China's leadership reaffirmed that China will 'strive to' – vs. 'try to' earlier – minimize the bleak impact of the outbreak and ensure this year's economic goal is achieved, including doubling the 2010 GDP.
With President Xi focusing on delivering economic targets, markets are moving to price in more accommodative policies that should be rolled out soon to support growth. Expect the People's Bank of China to cut the 1y MLF rate and 1y LPR by 20bp and the TMLF rate by 20bp-35bp later this month.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies