Asia Morning: Mind The Information Gap

Wall Street stock indices all hit record highs overnight as the Wuhan virus unwind spreads faster than the virus itself. Another night of impressive US data led by a blowout 291,000 climb in ADP Employment saw Wuhan virus concerns recede further in the minds of global investors. News stories suggesting breakthroughs in the treatment of the Wuhan coronavirus had earlier in the day propelled markets ever higher, with equities and oil rallying and Treasury yields climbing.

Notably, though, the World Health Organisation commented that there was no known treatment available for the coronavirus, nor was there on the horizon. It highlights the information gap between what we actually know about the Wuhan virus, and what we hope we know. The latter is predicated on assumptions that treatments are near and that China’s lockdown of 60 million people in the epicentre, Hubei province, is bearing fruit. That is a lot of assumptions, and with asset markets now back to the recycle the world’s savings glut FOMO trade at a breakneck pace, any negative headlines displacing the narrative, could have an outsized and rapid negative effect.

Undeniably though, the economic data trickling in for January has yet to show any severe spill overs in economic growth from the Wuhan virus. I suspect that story is still to come through. Last night’s ADP Employment mega-print has yet to feed through to upward revisions in Fridays’ Non -Farm payrolls though. The street is still looking for an increase of 160,000 jobs, implying that a degree of caution remains around the accuracy of the ADP data.

Some central banks are taking no chance, however. Yesterday the Bank of Thailand (BoT) cut by 25 basis points to a record low of 1.0%, as did the Brazilian Central Bank, cutting 25 basis points to 4.25%. The BoT cut made sense with Thailand’s critical tourism sector on the frontlines of a Wuhan slowdown, and with room on the currency front after a long rally over 2019 by the Baht.

The Monetary Authority of Singapore (MAS) surprised markets by commenting that there was room to weaken the NEER – a currency mechanism that Singapore uses in lieu of an official cash rate for monetary policy – to offset a Wuhan slowdown. With no policy decision expected from the MAS until April, the comments saw USD/SGD explode higher, jumping from 1.3730 to 1.3850. The Singapore Dollar is now 400 points weaker from its pre-Wuhan levels in early January. Authorities in Singapore though will have to tread a fine line from here, lest they draw the ire of US currency manipulator hawks in Washington DC.

Today, we have rate decisions from the Reserve Bank of India (RBI) and the Philippines Central Bank (BSP). Of the two, the RBI decision is the less clear cut. Stuck in a stagflationary situation with rising inflation and falling growth, the RBI is in somewhat of a quandary. This comes after an expansionary budget and increased deficit spending announced by the government last Saturday.

The decision at 1415 SGT will be a close call. I am erring to the side of a precautionary cut of 0.25% and damn the torpedoes on inflation, as economic growth fears outweigh price targets. Unfortunately for the RBI, no matter what its decision is, it is likely to be received negatively by both the currency market and onshore equities market. Such are the joys of stagflation.

The BSP will almost certainly shave 0.25%, cutting to 3.75% at 1600 SGT, following the BoT’s example and trying to get ahead of the game. With the Peso also enjoyed an extended period of strength, the central bank has room to move. Interestingly though, regional central banks overtly dovish monetary policy, bias is in direct contrast with the super-charged optimism prevalent on equity markets. Once again, investors should mind the information gap.

Equities

Wall Street climbed to record highs overnight as strong US earnings continued, economic data outperformed, and markets were awash with rumours of coronavirus cures around the corner. As we know, in this day and age, markets are expert at fitting the facts to the narrative they want to see. That was undoubtedly the case overnight as the buy everything FOMO trade continued its long march. The S&P 500 rose 1.12%, the Nasdaq rose 0.43% despite Tesla falling 17% over the session, and the Dow Jones rose an impressive 1.70%.

Asia has continued in much the same vein. The Nikkei 225 has risen 1.80%, the Kospi by 1.25% with the Shanghai Composite and CSI 300 both up by 1.25%. The Hang Seng has risen 1.50%, but the Singapore Straits Times has climbed on 0.25%. It would appear that investors in Singapore are not buying into hype elsewhere and remained more concerned about the effect on earnings of local companies from a growth slowdown in China.

The momentum is clearly with the bulls at the moment, and we see no reason to stand against that tide. The potential for an aggressive and rapid correction lower still lurks though, if negative Wuhan virus headlines emerge.

Currencies

The USD/SGD was yesterday’s big mover in Asia as the MAS released very dovish comments. As a world trade bellwether, Singapore’s SGD has sunk from 1.3450 to 1.3850 since the start of the Wuhan virus outbreak. The fact that the sell-off continues despite the irrational exuberance displayed in other markets should be a warning sign that perhaps we are yet at the end of the tunnel.

Elsewhere, the US rose overnight as US Treasury markets continued unwinding the haven trades of last week, with yields continuing to rise. Alongside a buoyant stock market and the end of the Trump impeachment trial, there were many reasons not to own Dollars, with the USD/JPY climbing to 109.90 and EUR/USD falling back below 1.1000 after soft Eurozone Retail Sales.

Asian markets are broadly unchanged today with most of the action likely to be in petro-currencies later on in the session as oil continues its tentative recovery. The Norwegian Krone and Russian Ruble, in particular, are likely to have bright starts against both the US Dollar and Euro.

Oil

Hopes that a coronavirus vaccine is near and the emergency OPEC+ rolling into a third day today propelled oil markets higher overnight. Brent crude rose 2.70% to $55.45, and WTI leapt 2.80% to $51.05 a barrel. Not even a much higher than expected official UC Crude Inventory number could dampen the enthusiasm.

Asia has fully embraced the worst is over theory with both contracts jumping again this morning. Brent crude rising 60 cents to $56.30 and WTI climbing 70 cents to $51.75 a barrel.

I suspect that a combination of two things drives much of the enthusiasm. The Expectation that OPEC+ will come to the party with more production cuts today. And an awful lot of fast money madly chasing its tail intra-day on oil markets, short-term trading momentum. With the latter being noise, the former looms as much more critical. If OPEC+ fail to announce more cuts to support prices, the oil rally could vanish as quickly as it began.

Gold

Gold had an intriguing session overnight, although it ranges were unremarkable. Gold once again tested the $1550.00 regions, probing lower to $1547.00 an ounce at one stage. However, despite the myriad of reasons to not own gold yesterday, it still managed to close higher at $1556.00 an ounce.

Gold has stubbornly refused to close below the $1550.00 every day this week, and that suggests that quite a bit of caution remains around the Wuhan virus fall-out despite the noise in other asset classes.

Gold is condensing into a narrow $1550.00 to $1560.00 range implying that a breakout is imminent. The indicators suggest that should be lower, but there is clearly much buying interest at the $1550.00 level. Bears may wish to wish to wait until $1545.00 breaks before jumping aboard the train downhill. Gold’s refusal to role over though is a warning sign for celebratory markets elsewhere, however.

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