WHAT HAPPENED YESTERDAY
As of Thu 13 Feb, Singapore Time zone UTC+8
FX MOVES
U.S. Dollar Index, +0.30%, 99.01
USDJPY, +0.08%, $109.87
EURUSD, -0.37%, $1.0876
GBPUSD, +0.04%, $1.2958
USDCAD, -0.23%, $1.3257
AUDUSD, -0.01%, $0.6713
NZDUSD, +0.69%, $0.6447
MARKET MOVES
S&P500, +0.65%, 3,379.45
Dow Jones, +0.94%, 29,551.42
Nasdaq, +0.90%, 9,725.96
Nikkei Futures, +0.12%, 23,842.5
SUMMARY:
The snoozefest that is the FX markets is shown by the EUR/USD move yesterday. EUR broke below the 2018 low of 1.0879 but could only reach 1.0866. It’s been trading in a tight range of 1.0870-80 since and remains heavy. The only other move of note was the NZD strengthening on a statement that sounded more hawkish than the market expected.
The narratives driving stocks higher remained unchanged. Reports continued to indicate the slowing pace of the coronavirus, Fed Chair Powell’s congressional testimony assured investors that monetary policy will remain favourable, and the positive bias in stocks (including non-US markets) continued to fuel risk sentiment.
U.S. Treasuries remained out of favour amid the bullish bias in stocks. The 2-yr yield increased two basis points to 1.44%, and the 10-yr yield increased four basis points to 1.63%. The U.S. Dollar Index remained strong, closing 0.3% higher at 99.00.
NEW ZEALAND CENTRAL BANK HOLDS RATES, SURPRISES MARKETS WITH UPBEAT OUTLOOK
At its first meeting of the year, the Reserve Bank of New Zealand (RBNZ) flagged new risks to the economy from the coronavirus epidemic in China but expected any impact to be limited. While RBNZ held rates at 1% as expected, the statement omitted a line used in previous policy statements that it would add further monetary stimulus if needed. It also delivered noticeably more upbeat comments about employment and consumer prices. Orr said he expected the impact from the virus might only last about six weeks, based on guidance from other government departments, but that the RBNZ had room to adjust policy if the hit was greater. The central bank also raised the forecast path for rates this year to 1%, from 0.9% previously, removing the chance of a cut.
IMPACT: The New Zealand dollar rallied after the country’s central bank kept interest rates steady as expected but dropped a reference to the chance of further cuts, a hawkish move that suggested its easing cycle might be over. Markets quickly scaled back wagers on a further easing with a quarter-point move at the next meeting in March put at less than 10%. In this context of an increasingly hawkish central bank, any signs of economic green shoots emerging out of Australia or New Zealand will embolden the commonwealth currencies to gain ground against the Dollar.
FINAL DAY OF POWELL’S TESTIMONY
In testimony before the Senate Banking Committee, Powell said the Fed had two recession-fighting tools; buying government bonds, known as QE, and communicating clearly with markets about interest-rate policy, routinely considered as “forward guidance.”
“We will use those tools — I believe we will use them aggressively should the need arise to do so,” Powell said.
IMPACT: Powell assuring the Senate Banking Committee that the Fed stands ready to use accommodative monetary policy when the need arises was good news for risk assets, especially U.S equities which made all-time highs. It is key to note the nuances of his language, the fact that he used the term “aggressive” testifies to the Fed’s resolve to support risk assets, hence this makes shorting equities, in the long run, a futile and painful experience.
LATEST VIRUS UPDATE (AS OF 13TH FEB MORNING): CORONAVIRUS DEATH TOLL LEAPS IN HUBEI PROVINCE
Health officials in Hubei province said 242 people had died from the flu-like virus on Wednesday, the fastest rise in the daily count since the pathogen was identified in December, and bringing the total number of deaths in the province to 1,310. The previous record rise in the toll was 103 on Feb. 10.
The grim new tally came a day after China had reported its lowest number of new coronavirus cases in two weeks, bolstering a forecast by Beijing’s senior medical adviser for the outbreak there to end by April. But the 2,015 new confirmed cases reported in mainland China on Wednesday were dwarfed by the 14,840 new cases reported in Hubei alone on Thursday when provincial officials said they had adopted a new methodology for counting infections.
It was not immediately clear why the death toll rose so sharply, but the spike in newly infected was due to them reclassifying many of the “warded close contacts” of previously identified cases which dropped from 185K yesterday to 77K today.
IMPACT: Asian stock markets wobbled and the safe-havens of the Japanese yen, gold and bonds rose on Thursday morning as the number of new coronavirus cases at the outbreak’s epicenter jumped sharply. This drives home the point that the situation still remains volatile and the development of the viral outbreak will be the key driver of risk appetite, especially during the Asian session.
DAY AHEAD
U.S. will be reporting its inflation numbers later today. CPI inflation has been diverging from PCE inflation – the Fed’s preferred inflation metric – in recent months and the headline rate is forecast to have edged up further in January to 2.4% year-on-year. However, the core rate is expected to have moderated slightly to 2.2% y/y.
While a positive surprise wouldn’t necessarily mean policymakers would turn more wary about a build-up in inflationary pressures, it would nevertheless underline the relative robustness of the US economy compared to its peers and maintain upside pressure on the US Dollar.
SENTIMENT
OVERALL SENTIMENT: Risk sentiment remains strong with stocks continuing to trade well. Big jump in the number of cases in China only caused a temporary blip as the market becomes accustomed to the new normal. This is much like how you boil a frog. Watch the progression of the spread of the Covid-19 in Singapore as that will be instructive on how the infection will spread in a well-managed city that responds with reactive measures.
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FX
US DOLLAR, USD (Neutral, Neutral, +ve)
JAPANESE YEN, JPY (+ve, +ve, neutral)
EURO, EUR (Neutral, Neutral, Neutral)
STERLING, GBP (Neutral, Neutral, Neutral)
CANADIAN DOLLAR, CAD (-ve, -ve, Neutral)
AUSTRALIAN DOLLAR, AUD (-ve, Neutral, Neutral)
NEW ZEALAND DOLLAR, NZD (-ve, Neutral, Neutral)
SWISS FRANC, CHF (+ve, +ve, neutral)
MARKETS
S&P 500, SPX (+ve, +ve, +ve)
NIKKEI 225, JP225 (Neutral, -ve, -ve)
SHANGHAI COMPOSITE, SSEC (-ve, -ve, Neutral)
TRADING TIP
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