Friday, February 7, 2020

Capital Markets: "Dollar Rides High as Eurozone Disappoints, and Caution Sets In"

From Marc to Market:
Overview: A more cautious tone is evident today in the markets, which seem to have run well ahead of macro developments and evidence that the new coronavirus is not yet contained. After a roughly 3.5% advance in the past three sessions, the MSCI Asia Pacific index pulled back with nearly the markets in the region slipping. The Dow Jones Stoxx 600 may end its four-day advance as materials, energy, and consumer discretionary sectors drag down the index (~-0.4%), which were not helped by the disappointing industrial production figures US stocks are also trading with a heavier bias. 
Benchmark bond yields are slipped 1-2 bp in Europe after 2-4 bp in the Asia Pacific region. The US 10-year is hovering around 1.60%, about 10 bp higher than a week ago. The dollar remains strong and traded at new highs for the year against the euro, sterling and the dollar-bloc currencies. It is firm against all the majors but the yen, where the JPY110 area proved sticky. Emerging market currencies are also lower. The JP Morgan Emerging Market Currency Index is off about 0.3% after falling almost 0.5% yesterday to give back this week's gains and threaten to extend the losing streak for the fourth consecutive week. Oil is steady as Russia contemplates the proposal to extend cuts to the end of the year and cut a bit more here in the first half. The March WTI contract is off about 1% this week coming into today. Gold is firm today but is off about 1.3% this week, its largest loss since last November.

Asia Pacific
Even before the outbreak of the new coronavirus, Japan's economy contracted under the weight of the sales tax increase and the typhoons. The government hoped that some measures would help offset the impact of the tax, but data earlier today raised fresh doubts. Household spending fell 4.8% year-over-year in December after a 2.0% drop in November. The Q4 drop was nearly 12%, only a little bit less than the roughly 15.5% decline in the three months after the previous sales tax increase (2014). Recent comments by BOJ officials suggest there is a growing concern of the virus impact on the Japanese economy in Q1,

S&P cut its forecast for China's 2020 growth to 5% from 5.7% due to the coronavirus. It is predicated on the idea that the virus is contained by March. It also assumes a quick snapback with 2021 growth at 6.4%. It notes that China accounts for roughly a third of global growth, and its slowdown will be felt broadly. Consider today's January trade figures that saw Taiwan's exports to China fell 7.9% (year-over-year) after a 1.8% rise in December. Imports from China dropped 18.2% after a 16.5% increase. South Korea saw its exports China slump by 10.5%, and imports fell 9.6%. Some of this will be the normal distortions around the Lunar New Year, but some no doubt reflect the economic impact of the coronavirus. Separately, news that China's reserves edged up to $3.115 trillion from $3.108 is of little material importance. This represents a net change of 0.25%, which is noise--i.e., reflecting no policy change or intervention, but just the normal fluctuation due mostly to valuation shifts including the euro's 1% depreciation against the dollar in January and perhaps part of the rally in bonds....