Financial market research and analysis

Wall Street is closed today for Presidents Day so that should mean thinner trading in general.

The number of new coronavirus cases has gone up in China but new stimulus measures from the Chinese central bank is putting investors at ease. The PBOC has cut ‘medium term’ rates in order to minimise the likely strain on the economy from the coronavirus. That will benefit around $29B in Chinese loans. This tells us a cut in the loan-prime rate (LPR) rate is coming on Thursday too.

EQUITIES

China stocks have reversed all the losses since re-opening after the Lunar New Year. The CSI 300 reversed earlier losses to near 3-week highs when the new rate cut was revealed. Japan’s Nikkei index bucked the trend of higher shares across Asia after the worse-than-expected fall in Japanese GDP growth was announced.

A surging British pound hurt the FTSE100 last Friday. Investors concluded that Chancellor Richi Sunak is more amenable to the kind of spending plans that are suited to Prime Minister Boris Johnson’s “levelling up” agenda. The aim of the spending would be to raise living standards outside of London and the South East. It can also cushion the economy through any Brexit bumps. We will just be watching the rumblings from credit agencies to see if Britain’s sovereign credit rating is at risk.

The DAX looks set to open at record highs on Monday, helped by multi-year lows in the euro and the belief interest rates will remain at rock bottom levels. Fears are growing that Germany could be nearing a recession but that makes it more likely authorities are forced to react. A recession coupled with a leadership void as Angela Merkel steps aside as Chancellor makes it likely that the German government ditches its policy of a balanced budget.

FOREX

The European Commission is assuming 1.2% growth across euro-area in 2020 but markets appear to be less optimistic. The euro struck 2015 lows against the Swiss franc and 2016 lows against the pound and 2017 lows against the dollar. Before fiscal stimulus comes down the pipe to react to the slowdown in Europe, the ECB will likely maintain asset purchases.

The Japanese yen is under pressure because Japan could be headed for a recession. Preliminary figures showed GDP in Japan fell -6.3% y/y and -1.6% q/q. A sales tax hike meant Japanese consumers front-loaded big ticket purchases into the third quarter and cut ordinary spending in the fourth. It’s the worst growth rate since Shinzo Abe came into office. The giveth with one had via low interest rates and taketh with the other hand via tax hikes approach from Abe isn’t working for Japan. And that goes some way to explain a plummet in Abe’s approval ratings. We see a high risk that the negative impact of the coronavirus could mean Q1 2020 sees a second quarterly decline and a technical recession in Japan.