Against the grain of public opinion—including the author’s—the Bank of Korea held rates steady at 1.25% this morning. In hindsight, that may be no bad thing. South Korea is likely casting an eye to China, Hong Kong and Singapore’s approach to mollifying the coronavirus slowdown.
That involves directly targeting SME’s through cash hand-outs, tax cuts, and cheap loans to tide over their working capital requirements and keep people in work. The same approach applies to the man on the street as well, with Hong Kong yesterday handing out HKD$10,000 to each resident and increasing income tax thresholds.
Paul Chan, Hong Kong’s Financial Secretary, may, in fact, be my new favorite finance minister. Having frugally accumulated reserves for a rainy day like Singapore, Mr Chan enacted a form of quantitative easing at its purest in yesterday’s budget. Although the Government is not printing money, it is handing it out via cheap credit to SME’s and cash dollops into people’s pockets. The monetary transmission mechanism of quantitative easing since the GFC has proven woefully inadequate. Banks either hoard the cash, or lend it to large corporations or via mortgages, but certainly not to SME’s. Ten years later, asset prices are in space, debt levels are higher than ever, yields on savings are almost non-existent, no-one feels more prosperous, and income inequality is at record highs.
Cutting rates to zero and printing electronic money in a classic monetary response to a global slowdown, will be ineffective this time around, as coronavirus infects the cogs that make up supply chains and consumer consumption. Working capital is the key in the world of the SME; if you can’t pay your bills at the end of the month, you are done. Whether rates are at zero, or ten per cent, makes no difference to that equation.
President Trump finally addressed the arrival of coronavirus on U.S. shores, and the Government’s response to controlling its potential spread, firstly pronouncing that the stock market sell-off was mostly due to the possibility of a Democrat winning November’s election. He then appointed Vice-President Mike Pence to oversee the coronavirus preparations. Neither inspired an already shaky North American market, with stock indices futures extending losses after the close, assisted by a warning from Microsoft (NASDAQ:MSFT) after hours, that coronavirus would infect some of its results.
With cash pouring into the relative safety of U.S. Government Bonds, yields across the curve hit all-time lows overnight, as the markets also started pricing in at least two Fed Funds rate cuts this year. Unfortunately, if the cogs of small business start seizing in the U.S., the Government’s trillion-dollar deficits leave it with precious little wriggle room to offset an SME shock. Nor will a couple of 25 basis point rate cuts make an iota of difference when the real story is all about cash flow.
That same sinking feeling is likely being felt in Europe right now, where rates are already zero, the ECB is already quantitatively easing, and there is ideological opposition to fiscal stimulus. Europe may well be staring at a deeper abyss should the coronavirus outbreak intensify globally. Having outsourced all the hard decisions and responsibility for keeping the post-GFC lights on to the ECB, Europe may yet pay a heavy price for its intransigence.
In Asia today, the clouds didn’t get any thinner. Taiwan Consumer Confidence fell to 83.93, but the news from the lands down-under was particularly uninspiring. New Zealand January Business Confidence collapsed to -19.4, and Australian Capital Expenditure for Q4 tumbled to -2.80%. Ominously, both data sets pre-date February, when coronavirus truly moved to center-stage. With Australia in particular, and New Zealand to a lesser extent, both heavily reliant on commerce with China, it is no surprise that both their currencies after under the cosh. That situation is unlikely to change soon.
Today’s highlight will undoubtedly be the U.S. Estimated GDP for Q4, with the street penciling in an unchanged 2.10% growth rate. To some extent, the result will be drowned out in the noise of the coronavirus situation, being backward-looking pre-outbreak. A low print, however, could have an outsized negative effect on already punch-drunk equity markets.
Equities
Wall Street attempted to rally after two days of heavy losses overnight. The rally soon spluttered though, as news filtered through of potential coronavirus cases popping up all over the world and in particular, the United States. The S&P 500 fell 0.37%, the Dow Jones 0.45% with the NASDAQ holding on by its fingernails, clawing out a 0.17% gain.
Post the New York close, Microsoft (NASDAQ:MSFT) warned of the virus's impact on its supply chain and results. That has sent futures lower on all the major indices, in after-hours trading, by around 0.30%.
Asia has had a mostly negative start to the day, with only Mainland China in the green, supported by a reducing rate of infections and potential stimulus measures. The Shanghai Composite has risen 0.70% and the CSI 300 by 0.60%. Against the price action around the rest of Asia, both rallies look fragile.
Across the rest of the region, however, the news isn’t so good. The Straits Times is down 0.75%, the Hang Seng by 0.80% and the KOSPI by 0.90% after the Bank of Korea held rates unchanged. Down under, the Australian All Ords is lower by 1.0% and the NZX 50 by 0.40%.
Asian stocks have probably seen the worst of the day, unless U.S. stock futures take another leg lower. Coronavirus will continue to dominate equity sentiment, and one can’t help but feel that we are still nearer the beginning than the end. Against that background, equity rallies are likely to be there to sell.
Currencies
The U.S. dollar was modestly stronger overnight. Against the euro, it was almost unchanged at 1.0885, with the single currency being supported by the unwinding of EUR/Emerging Market carry trades. Sterling gave up its gains, falling 0.85% to 1.2895. Its support eroded by the seemingly intransigent negotiating positions of the UK and Europe ahead of trade talks starting next week. USD/JPY continued to hover around the 110.00 marks as the yen haven flows abated, with 109.50 looming as the next important support.
Over in EM, the offshore and onshore Chinese yuan continues to be strangely quiet. Onshore yuan has spent most of this week around 7.0150, offshore yuan has actually quietly gained against the greenback. USD/CNH falling from 7.0600 to 7.0240. Part of this may be explained by the relatively narrow ranges of the U.S. dollar against the majors in recent days. The reduction in the number of daily infections in China may also be giving hope that the worst is behind the Mainland. As China returns to work, time will tell. USD/CNH though, has traced out a triple top around 7.0600 that will be challenging to break.
Elsewhere in Asia, local currency markets are quiet, and their ranges narrow, as traders await direction from other centers and further insights into the coronavirus outbreak. With oil falling again overnight, petro-currencies such as the ruble and Norwegian krone, Canadian dollar and Mexican peso will remain under pressure.
Notably, overnight, the Australian dollar plunged by 1.0% to 0.6550. With 1/3rd of Australian exports heading to China, the lucky country is one of the most exposed to a drawn-out slowdown there. With the central bank almost sure to ease again to record lows, and an already soft domestic economy, it will be some time yet before a case can be made to go long.
Oil
A fall in official U.S. Crude Inventories could not save oil overnight, with both Brent crude and WTI having yet another horrible day at the office. Fears were increasing of a collapse in global consumption due to a coronavirus-induced global slowdown. Brent crude fell 3.0% to $53.35 a barrel, well below the $55.00 a barrel that should be OPEC’s line in the sand. WTI meanwhile, slid through the critical $50.00 level, falling 2.90% to $48.60 a barrel.
The rot has continued in Asian trading. Brent crude has fallen 1.10% to $52.85 a barrel, with no technical support evident until the $50.00 a barrel areas. WTI has declined 1.40% to $48.10 a barrel as the rout continues and no technical support evident until the December 2018 lows around $42.00 a barrel.
Although the technical picture looks grim, it is hard to envisage those levels being achieved in the near-term. The falls this week, primarily through $55.00 on Brent crude, are likely to awaken the OPEC+ grouping from their slumber finally. Having bet the house on a do-nothing strategy in the hope that coronavirus would pass quickly, this position is becoming more untenable by the day.
Expect a response from OPEC+ to try and stabilize prices, sooner rather than later. It could lead to some sharp speculative spikes in the days ahead, although their longevity will be short.
Gold
With Monday’s FOMO fast money well and truly flushed out of the market, gold quietly got back to work in its role as a haven asset. Gold rose modestly overnight by 0.40% to $1641.00 an ounce and has risen again this morning to $1647.00 an ounce.
More modest, but sensible haven flows are evident in gold. They will continue to support the yellow metal on any dips, as the coronavirus outbreak shows no signs of going away.
The drop to $1625.00 an ounce on Tuesday, as Monday’s fast-money bulls were consigned to the bonfire, has turned out to be a bargain entry point for the more patient. It is now technical support $1664.00 an ounce and Monday’s highs at $1690.00, the next technical resistance regions. Monday’s histrionics aside, gold's price action continues to be constructive and points to further gains ahead.