China GDP outperforms

China starts week with strong data

China’s GDP for Q4 showed an increase of 6.50% YoY for Q4, leaving China on track to expand by 2.30% for 2020. Industrial Production rose by an impressive 7.30% as the rest of the world’s insatiable demand for Made in China showed no signs of slowing down. By contrast, domestic data still showed the caution that has been prevalent throughout the year. Retail Sales for December rose 4.60% versus 5.50% expected, a cause for joy in any other country but China. That likely reflects the Covid-19 restrictions in parts of the country and the freezing weather that has sent energy prices soaring. Unemployment, though, held steady at 5.20%, and this metric will leave Chinese authorities still in their comfort zone.

All in all, China’s data continues to show that it is and will continue to lead the world out of the pandemic-related recession in 2020. It will lift the rest of Asia with signs of life appearing in Japan, with the Reuters Tankan Index rising to -1 from -9 previously. Singapore’s Non-Oil Exports also vastly outperformed, rising by 6.60% in December (3.30% exp), although admittedly, it is an extremely volatile number.

The Bank of Japan announces its latest rate decision this week, and although rates will remain unchanged, there is an outside chance they maker tinker with its yield curve control programme. Japanese JGB yields have spiked on this which has seen USD/JPY ease to 103.75 this morning after US yields eased on Friday. The effects are likely to be transitory though as I see no reason for the BOJ to tinker, and ahead of an expected flurry of Biden executive orders on Wednesday which will probably lead to US dollar strength.

Bank Negara Malaysia could well trim interest rates later this week though. Having held rates steady at 0.75% since the mid-year, Bank Negara finds itself in an almost unique position in Asia where regional central banks have cut rates to rock bottom. Along with Indonesia, it has room to ease, helped by Malaysian ringgit strength, and may choose to exercise that option and cut 0.25% this week. The driver is the impact on the domestic economy caused by the surge in Covid-19 cases, and the ensuing movement control orders across the regions that form the backbone of Malaysian GDP. The ringgit will almost certainly come under pressure this week as I expect the US dollar to remain firm anyway. Malaysian equities though should receive the news warmly.

Although we have a lot of second-tier data across the world this week, all eyes will be on Wednesday in the United States with the transfer of power from President Trump to President Biden. Expectations are elevated for a flurry of directives unwinding many Trump executive orders, as well as a flurry of Mr Biden’s own executive orders.

Markets will be especially interested in US-China relations as the administration banned US companies from selling semiconductors to Huawei over the weekend. That has caused a temporary dip in semiconductor manufacturers across Asia today, although it should be short-lived, given the global semiconductor shortage. More interesting will be if some of the Trump administration restrictions regarding China are eased. President-elect Biden has been deafening in his silence on China relations, and any sign or a less confrontation approach should be bullish equities everywhere.

The presidential nomination for Treasury Secretary, for Federal Reserve Governor Janet Yellen, testifies tomorrow. The Wall Street Journal has written that it expects Ms Yellen to say that market forces should determine the US dollar level. A stark contrast from the weak dollar Trump administration. The US dollar rose ominously on Friday and continues to do so today. With almost a year’s worth of short US dollar positions in the market still, that could give more momentum to the US dollar short squeeze which I expect to extend into February.

US markets are partially closed today for Martin Luther King Day. Stock and bond markets are closed amongst others, although currency markets remain open. That is likely to reduce liquidity in Asia and Europe and leave markets vulnerable to volatility spikes on headline risk. Into the second half of the week, policy visibility and executive order issuance from an inaugurated President Biden will dictate market direction.

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