Hong Kong shares dip, FOMC on tap
The pendulum of risk swings back and forth…Hong Kong
shares sunk overnight as expected as the market played catch upon reopening
after the new year holiday. The Hang Seng dipped 3% before paring losses a
touch to trade 2.6% weaker.
This comes after a rebound in the US and Europe as
investors decided to buy the dip following Monday’s sell off. The Dow added 187
points, after shedding 450 on Monday. The S&P 500 rose 1%. The FTSE 100 and
DAX both climbed 0.9%.
Ahead of the open, futures indicate a flat open for
European markets as they seek fresh direction from the Fed meeting later,
developments in China with the coronavirus, and a raft of corporate earnings
on Wall Street. The Dow could be particularly sensitive with Boeing, McDonald’s
and Microsoft reporting. We also have Tesla and Facebook coming up – it’s a big
day for earnings.
terms of the Fed meeting today, the key thing we’re looking for today
relate to balance sheet expansion – anything that suggests the free money taps
could be turned off may expose riskier assets. Markets are accustomed to the
Fed riding to the rescue and using monetary policy to create an easy path
higher for stocks. Today’s Fed meeting will be important against this backdrop
of heightened risks and we also need to look at whether the expected increase
in the IOER by 0.05% to 1.6% will worry markets. As
detailed in our Fed preview: Just tweaks, we expect no change to the fed
funds rate and for the FOMC statement to describe policy appropriate. Market
pricing indicates no chance of a cut. The emergence of the coronavirus in China
will warrant a degree of caution in the outlook from the Fed, whilst
there is little upward pressure on prices to suggest a shift in the FOMC’s
stance. The signing of the US-China trade deal only confirms priors and
doesn’t materially alter the outlook from last month. Recent economic data only
confirms momentum has slowed but remains solid. Yesterday’s December
durable goods orders ex-defence were sharply lower. Easing bias still
very much place.
Coronavirus is already bigger than SARS was in China. There are
now confirmed cases of the coronavirus in mainland China, including 132 deaths,
according to China’s National Health Commission (NHC). There’s mutterings the
true number is much higher. The White House is said to be considering an
outright travel ban between the US and China – this would have serious
implications for trade and the economy.
Cases are rising but the questions
over the coronavirus outbreak as it pertains to the Chinese – and therefore
global – economy remain unanswered. Could it affect China’s ability to meet
trade deal commitments for instance? There is a worry if things get really bad,
not only do we see a material decline in Chines GDP growth, but this also
creates headwinds for complying with the deal. Further deterioration in the
yuan is among the most obvious concerns as we have seen USDCNH rally since the
outbreak and threaten to go above the key 7 level. In terms of growth being
affected in China, there is a clear risk to supply chains and contagion in the
rest of the region as well as knock-on effects further afield. The most obvious
risks are to consumption but a sustained lockdown in the major cities would
also tend to lead to a loss of output that could be hard to claw back later in
The swing in the risk pendulum favoured stocks and oil but
sent gold bulls packing. Crude oil recovered the $54 handle to
successfully close the gap from Sunday’s open. Sentiment remains dicey. OPEC
and co are getting on the wires talking up prices, indicating they’re starting
to really worry. Gold has eased off highs north of $1580 to trade around
Interestingly both gold and oil have closed their respective
gaps after moving sharply at the start of the week on coronavirus fears.
Markets have been swift to retrace, so we now must see whether these mark
reversals or whether the pre-existing trends reassert themselves.
Sterling is steady ahead of tomorrow’s knife-edge Bank of
England decision. Markets see a roughly 50% of the MPC voting to cut rates. GBPUSD
is well anchored at 1.30 but whatever the outcome will slip that berth. Recent
comments from several policy makers at the Bank, some softer inflation data and
GDP numbers, and persistent risks to the global outlook suggest the MPC may
choose to act now to cut.
Meanwhile Britain has decided to allow Huawei to supply
parts of its 5G network. This could be a mistake, and make doing a trade deal
with the US harder. But it also be a bargaining chip. It also indicates
the UK is prepared to forge its own course, which is no bad thing.
EURUSD has found support at 1.10 is bonding for now. USDJPY
continues to languish at 109 but there’s not much conviction on either side to
see 108 or 110 first.