Asia Open:The PBoC Policy Bazookas

Markets

Global markets have advanced on the back of the better tone from yesterday’s Asian session. The main staging post was unquestionably the Chinese equities that managed to claw back some of Monday’s steep losses. The CSI 300 finished the day up 2.64% after a 7.88% drop. Other Asian markets, however, weren’t initially so passionate. Still, in the absence of hard data to quantifiably guide risk, the diminishing fear factor around the virus, along with the PBoC policy bazooka, has boosted sentiment.

In turn, there has been a significant bounce in Chinese equity ETFs overnight. The FTSE China A50 (XUA) is leading the charge, which makes sense if you believe the   FT article about a so-called “national team.” Who are saddled up and ready to defend the PBoC’s equivalent of Maginot line? (I hope that analogy resonates on some level) And clearly, the broader markets believe these proxies offer a better steer as its been a great day in the macro markets with a multitude of crossovers (SPX & USDJPY) ripping higher.

Just as has been seen in stocks, the virus panic is starting to come out of bonds. But if your holding bonds amid this disinflationary shock of the coronavirus in the pipeline, you may want to take heed. The coming deluge of stimulus could have an astonishingly inflationary impact.

I’m probably the market’s worst stock picker, but I’m always quick to own up to my mistakes. And while I have been quick to suggest of late, that the US equity market doesn’t provide the best pilot for risk, that view is entirely wrong. With the falls in the commodity market clouding my better judgment and pushing the markets fear index through the roof, the SPX has been unyielding in its propensity to consume virtually everything the market can throw at it, including the kitchen sink. If war, the mutant black plague, or even with half of China going underground hasn’t knocked the S&P 500 off its high-horse, I’m not sure anything will.

There has to be some particular reason beyond tarot card readings why the market is on the ups, and while the economic impact is starting to surface, there is still a lot of number crunching to be had.

However, here is what I’m thinking based on a less fuzzy look through the Wuhan virus lens,

1) The coronavirus outbreak appears to be slowing outside the Hubei Province.

2) The PBoC policy responses are lining up

3) expect more fiscal measures to follow

4)the WHO falling short of labeling the Coronavirus outbreak a pandemic. Instead, WHO sees an epidemic with multiple locations, with cases outside of Hubei described as “spillover cases.”

5) reasonably dismissive commentary from central bankers about the long-term impact (Bostic in the US and the RBA’s post-meeting statement),

So, markets look to be shrugging off Coronavirus concerns. At least for now.

Oil markets

Crude tried to rebound on Tuesday, as OPEC and its allies convened what amounts to an emergency meeting in Vienna to conduct an “urgent” assessment of how the coronavirus outbreak is likely to impact demand for crude, which plunged 16% last month in the worst start to a year since 1991.

And while OPEC + is apparently on the same page and speaking from one voice, the market is replying with an even louder unified voice as Oil traders continued to give their sell button a good work out overnight.

Additional OPEC+ cuts are necessary to put a floor on oil prices and the thought that they are unlikely to sit on their hands, even prompted a decent short-covering rally. But to no avail, as the market looks to be building up for yet another (black) swan dive. WTI settled below the critical $50 mark for the first time in over a year as Chinese refineries are stuck trying to give oil away. So, unless OPEC can discover a way to put oil back in the ground, the path of least resistance could be lower.

Oil continues to be driven by growing concerns about the demand impact of the coronavirus and the potential offsetting impact of a possible OPEC+ supply response.

But let’s not try to sugar coat things here, with nearly 50 % of China industrial complex shuttered we’re headed for one of the worst Q1 economic growth periods on record. With a significant haircut yet to be completely factored into the equation, for the finely tuned global oil supply balances, it will be like the equivalent of mixing oil and vinegar; they don’t mix.

Honestly, every time I read an OPEC headline, I have thoughts of The Little Dutch Boy putting his thumb in the dike.

The oil market is falling sharply, which is pretty alarming given OPEC is considering an emergency cut. But the implied near-term conservative fall in demand from China could create a supply/demand imbalance of >1Mbd in 1Q. The magnitude of this of implicit demand-driven inventory swell is of epic proportions and closely correlates with a historical sell off’s towards near term cash cost levels (break evens). So, once the reality of the data demise sets in, we should expect a lot of Q1 oil price revision coming down the pipe. Even more so, after looking at my inbox this morning, which is brimming with “Impact of the coronavirus on global growth” conference call invitations.

Gold markets

I got up early to write my gold commentary, and I have spent two agonizing hours trying to formulate a view with some level of sensitivity. Even more so, after looking at the latest EFT gold holding data, I would imagine a lot of investors are taking it on the chin today.

The gold market hit the skids as global equity markets rebounded on receding Wuhan virus fears. Still, arguably the move may be overdone and possibly attributed to positioning length as many investors got stopped out of positions as momentum continued to cascade lower.

The recovery in investor risk-on appetite, as corroborated by equity market rallies across the globe, incontrovertibly undercut the demand for gold. For now, China’s liquidity measures have more than offset the market fears about coronavirus concerns.

With Nasdaq hitting a record high and attracting USD inflows, which has seen $Index holding above 97.80, this also dented oil demand.

Bond yields also rose, which is typically negative for gold, but it was the rebounding equity market that did the most damage.

And then to rub salt in the gold market, wound positive US economic data undercut prices. December factory orders rose the most in 18 months in December.

Currency markets

I’m not sure if it’s still too early to repurchase a blue ticket back to AsiaFX, but the PBoC policy bazooka and currency guidance are certainly offering up an inviting springboard. While its also a bit early to suggest outhouse to the penthouse, the PBoC’s backstopped knock-on effect should ultimately attract regional inflows, especially if the Yuan continues to travel on a positive tangent. . And with the Ringgit turning overly bearish in quick order on China risk as local equity outflows raced higher given Malaysia’s export to China sensitivity. The PBoC stimulus effort could provide a boost to both Malaysia’s manufacturing and commodity export sectors and as quickly reverse the tide.

 

With that said, the bias remains to buy USDCNH for a defense against a fix above 7.0 USDCNY if economic concerns in China deteriorate quickly. In turn, a bearish for EMFX fix above 7 USDCNY, will provide the next staging post for a significant Asia FX risk wobble, which could then open the door for a Yuan correlated MYR selloff reminiscent of August -September 2019 lows.

The same goes for the rest of EMFX Asia.