Restricted Market Trading Comments

Dollar softness this week will take some pressure off of the foreign currencies but it’s too early to sound the all clear.  This piece focuses on how  central banks around the world may be intervening to influence their currencies.  Most of the world, particularly EM, is grappling with supporting weak currencies but a select few are dealing with stronger currencies. This is a very opaque process and so we are simply making our best guesses.

Over the weekend, China reported stronger than expected November PMI readings while Korea reported weaker than expected November trade data.  While the China data is welcome, we put more weight on Korea trade numbers, which typically serve as a good bellwether for the entire region.  Press reports suggest the Phase One trade deal has stalled due to Hong Kong legislation passed by the US Congress.

EM FX was broadly firmer last week, taking advantage of the dollar’s soft tone as well as another wave of risk-on sentiment.  Bullishness on the global economy is quite strong, whilst we are perhaps a bit more skeptical given ongoing weakness in the UK, Japan, and the eurozone.  Dollar bearishness may also be overdone given our more constructive outlook on the US economy, but technical damage has been done that must now be repaired.

The spread of the coronavirus continues and is likely to weigh on risk assets and EM.  Most markets in Emerging Asia are closed for all or part of this week due to the Lunar New Year holiday.  China has extended the holiday until February 2 as it struggles to contain the virus. 

EM remains vulnerable to deteriorating risk sentiment as the coronavirus spreads.  China announced a series of measures over the weekend to help support its financial markets, but this may not be enough to turn sentiment around yet.  China markets reopen Monday after the extended Lunar New Year holiday and it won’t be pretty.

Below is a non-exhaustive list of medium- and long-term implications from the Covid-19. We discuss the yuan, China’s competitiveness, its position in the global production chains, the impact on the Phase One trade deal, and rising financial stability risks. Globally, the virus will bring about a new wave of fiscal spending and revive the discussions about the limits of monetary policy.

Market sentiment is likely to open this week on an upswing after the Fed’s emergency rate cut and expanded QE were announced Sunday afternoon local time.  Yet as we have seen time and again this past couple of weeks, added stimulus has had little lasting impact on markets as the virus numbers continue to worsen.  Europe is now reporting more daily cases than China did at its peak.  We remain negative on EM until the global growth outlook becomes clearer.

The death toll from the virus continues to trend lower in Europe and the US; the dollar remains under some pressure. The Fed announced an expansion of its Municipal Liquidity Facility (MLF); regional Fed manufacturing surveys for April continue to roll out; other data will be reported.