US Open – Risk Appetite Grows ahead of Powell, Oil bottom in place, Gold rally pauses, EM in focus

Global equities are higher across the board as investor optimism grows that Beijing is confident enough to allow its largest businesses to resume industrial production and on hopes that Fed Chair Powell’s testimony to Congress will signal that the coronavirus impact to the global economy could warrant further stimulus from the Fed.  It seems that Beijing is losing patience with allowing the economy to fall to stall speed, the worst levels in almost three decades. President Xi is pushing back and signaling leaders to avoid “more restrictive measures”.  The Chinese death toll is now over a 1,000 and the number of confirmed cases has climbed to 42,638, but the trend in net daily changes seems to be declining.  The net daily change in globally confirmed cases almost reached 4,000 on February 4th and has since declined to the 2,548 as of yesterday. 

The global stock market rally is being powered by central banks and with a lot of the January and February data being tossed out the window, risk appetite may run wild for a few more weeks.  The PBOC will remain active in delivering more easing and with the Fed possibly on standby, risky assets could remain attractive in the short-term.

Oil

The bottom seems to be in place for oil prices.  It is way too early to be confident that peak of the virus will happen this month, but optimism is growing that we could see Beijing resume some normalcy in travel and trade outside of the Hubei province.  It seems President Xi can’t stomach any further weakness to the growth outlook and we will see much of China return back to normal rather soon.

With no help from the OPEC + alliance, oil prices have managed to stabilize and move a way from the dangerous threshold that could have opened the door to extreme selling.  Oil could see further upside today if Powell delivers a dovish testimony that weakens the dollar.  The risks to the outlook are obvious and the Fed could shift to ready to act mode. 

Gold

With US stocks back in record-setting mode and green everywhere else, it is no surprise that gold prices are slightly softer today.  With investors focused on Powell’s testimony later today, we could see gold’s bullish momentum reassert itself as the Fed chair might sound more dovish as he explains how the coronavirus in China presented a new risk to the outlook.  Gold’s longer-term bullish backdrop will remain primarily supported on physical demand from central banks and rising risks to the global growth that will trigger another wave of worldwide stimulus.

EM

Emerging markets have been feeling the pressure of coronavirus impact on the global outlook.  Risk assets abroad remain vulnerable as developing world focuses on whether the coronavirus could infiltrate their homeland or provide a greater shock to a key trading partner.  

One of the favorite trades heading into the New Year was buying emerging market ETFs and that streak of 16 consecutive weekly gains was snapped after almost topping $19 billion.  Some investors may choose to hang onto the emerging market trade only if we see continued optimism that the coronavirus will peak by the end of the month.  

With much of the emerging market central banks likely to signal more easing is on the way, the dollar may remain stable this quarter if Powell doesn’t become dovish.  

Turkey

The lira is getting hammered after the situation on the Syrian border intensified following the Turkish military retaliation against the Russian-backed Syrian forces.  Turkish and Russian relations are falling to a new low and it could get worse for lira until Erdogan and Putin meet. 

Mexico 

The unwinding of the Mexican peso trade may be gaining momentum as the Banxico is expected to deliver another 25 basis point cut to the overnight rate to 7.00%.  The impact of the coronavirus will weigh on LATAM, with Mexico likely seeing further cuts as the economic growth outlook takes a turn for the worse.  The fourth quarter was weaker than expected and with further softness expected now, the Banxico will remain cautious and possibly open to delivering a couple more cuts after this week. 

Peru 

Peru’s sol is extending its decline as their central bank is expected to cut rates later this week as concerns grow to the outlook and on lower inflation expectations.  Peru is going to see a couple tough quarters as copper prices plummet and on Chinese growth uncertainty.  With economic activity looking soft even before their key trading partner got with the coronavirus, further accommodation is expected by Peru’s central bank.  

Colombia

Much of LATAM is jealous of Colombia’s economy.  This week is expected to be another strong week for the favored investment in Latin America.  On Thursday, manufacturing production and retail sales data for the last month of the year are expected to show strong improvements.  The key economic release will come on Friday when fourth quarter GDP is expected to tick higher on a quarterly basis to 0.7%, while the year-over-year reading stays steady at 3.3%.  Colombia’s COLCAP is currently struggling to find bullish momentum, but a sustained pullback seems unlikely.  Colombia is likely to remain one the favorite risk investments for emerging markets. 

South Africa

South African President Ramaphosa’s state-of-the-nation address is ‘do or die’ time for the rand.  The South African currency is the worst-performing currency in 2020 and if markets are unconvinced Ramaphosa will turn things around, we could see it get a lot uglier for the rand.  The rand has weakened almost 6% this year as the South African economy has been hampered with consistent shortfalls in tax revenue, rising debt levels, the failure of Eskom and lost confidence in the government.

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