Monthly: Greed and fear
- Regional travel, tourism, and commerce are getting hit by the day
- Forecast downgrades will likely come in February
- Asian FX and high yield debt issuers are the most vulnerable
Economics: Just as the recovery was gaining momentum, cometh the 2019-nCoV
Ample liquidity, low interest rates, trough in the electronics cycle, relaxed fiscal policy stance in the major economies, and a trade war détente had set conditions for a well-supported 2020. But just as the markets were ready to look past trade tensions and rally around a supportive macro environment, the 2019-nCoV outbreak has injected a degree of uncertainty not seen since the height of trade wars. It is too early to consider forecast downgrades, but they will likely come in February, as travel, tourism, and commerce are getting hit by the day. Asian FX and high yield debt issuers are the most vulnerable, in this context.
So far, the VIX has rebounded; equity markets have sold off; Fed rate cut probability has risen; high yield spreads have widened in both the developed and emerging economies, gold has firmed; oil has slumped; RMB is weakening and flirting with 7 to the USD level again (after rallying strongly for a month till mid-January); overall EMFX has also been dragged down by the RMB in the past week.
At the same time, markets have way too many things going in favour to reach a point of capitulation. Company earnings data, admittedly backward looking, have been favourable; the upside to electronics demand still looks to be in place for the year; USD funding conditions remain exceptionally favourable. As a result, US equity prices in particular have eased only modestly, despite a spectacular spike in recent months.
Some data points, largely unrelated to the nCoV outbreak, worry us. Slumping oil prices despite heightened middle-east concerns, along with a sharp decline in freight rates, as well as rising gold prices despite an absence of inflation are symptomatic of a global cycle where there is little conviction about the outlook, although many favourable macro factors are present.
The coming month will be yet another tussle between greed fuelled by low rates against fears of a global pandemic. We are concerned about the near-term regional economic outlook, especially if the pandemic is not contained in the next couple of weeks. Our hope is that efforts to deal with the virus, which have been aggressive in the past ten days, will bear fruit shortly. Or else, there will be downgrades galore.
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