Trade of the Day: Stocks and futures rally on China tariff cuts; safe havens yen and US Treasuries slip
Quote of the Day: “The logarithmic number of new cases has dropped below the R0 of 2.0 to 2.5, while other behavioral measures of panic also seem to be receding. The disconnect between the price action in commodity markets & China equity markets is narrowing, suggesting the growth shock is almost fully priced,” said Jefferies strategists in a note.
Stock of the Day: Melco International rose as much as 6% as it terminated an agreement to buy a 9.99% stake in Crown Resorts. Melco said the decision was taken as it reassesses all non-core investments to be made in 2020.
Number of the Day:. $1 billion. Twitter’s quarterly revenue topped $1bn for the first time, beating the street and sending its shares up 9% in pre-market trading.
Tip of the Day: “Asian credit is worthy of consideration but careful selection is needed. We see value in China, particularly in high yield and property, with pockets of value in Indonesian and Indian high yield. Within the semi-government hard currency corporate universe, we see some value in Indonesian quasi-sovereign issuers. On Asian hard currency sovereigns, we are cautious on frontier markets, such as Pakistan and Sri Lanka, due to high valuations, especially when factoring geopolitical and fiscal risks,” said Angus Hui head of Asian & emerging market credit, fixed income at Schroders.
Financial markets rallied after China lowered tariffs on some US goods to soften the economic blow from the fast-spreading coronavirus, which has claimed 565 lives and infected over 28,000 people. Beijing halved tariffs on a wide range of goods, with the Ministry of Finance saying the decision was taken to “promote the healthy and stable development of Sino-US economic and trade relations.”
The MSCI Asia-Pacific ex-Japan index rose 1.77%, the Australian S&P ASX 200 climbed 1.05% and Japan’s benchmark Nikkei 225 jumped 2.38%. Hong Kong’s Hang Seng index soared 2.64% as the telecoms, energy and industrial sectors posted hefty gains.
Analysts said they expect Beijing to introduce a raft of measures to offset the damage caused by the epidemic.
“Following the 10bp cut to reverse repo rates on February 3, we believe the PBoC, MoF and other government agencies will inject additional liquidity, provide additional credit support, extend loan terms, cut or postpone taxes and other fee payments and encourage landlords to lower rents,” said Nomura economist Ting Lu.
But he said that given the limited scope of policy easing, Beijing is unlikely to overly stimulate its economy during the recovery stage to compensate for lost GDP during the lockdown. Still, analysts have started to lower their growth forecasts for the world’s second-biggest economy.
“Conventional stimulus to boost investment and consumption demand simply do not work under such conditions. In our “good” scenario, Beijing can still achieve its goal of doubling real GDP in the decade of 2011-2020,” he said.
Financial markets are eyeing the region’s economies as the impact of the virus starts to unfold with expectations running high that interest rates will be cut while keeping the monetary policy stance dovish to soften the impact of the blow.
Earlier in the day, the Reserve Bank of India kept the policy repo rate unchanged at 5.15%, as expected, but the Indian central bank also “decided to continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.”
“The RBI moved its focus to encouraging lending and remedying transmission, which has shown some signs of improvement,” said Barclays economist Rahul Bajoria. “The stance of monetary policy continues to be accommodative, with the RBI expecting the current inflationary spike to be a transitory phenomenon. We think the next window for modest rate cuts may open in H2 2020, provided CPI inflation declines either quicker or in line with RBI’s projections.”
The Philippines central bank lowered its overnight borrowing rate by 25bp, to 3.75% today as expected. Bangko Sentral ng Pilipinas Deputy Governor Dakila said, “Philippines still has a lot of monetary space,” hinting at further cuts to support the economy.
“The bank emphasized in the press conference today that while it thinks the outlook for growth is robust, there is still plenty of policy space, noting that it has still only unwound 100bps of the 175bps of hikes made in 2018. Overall, we are sticking with our forecast for a total of 50bps cuts in 2020, which would take the policy rate to 3.5%,” said Alex Holmes, economist at Capital Economics.
US S&P futures edged up 0.2% and the Stoxx Europe 600 index added 0.3% as the China tariff reductions lifted the mood. Later in the week, investors will await the January jobs report from the Labor Department, which will be released on Friday. Economists are expecting 158,000 new jobs and for the unemployment rate – which was at 3.5% for December – to stay the same.
