COVID-19 and China credit; FX roundup


COVID-19 mostly infected private Chinese credit. Cautious optimism faded into concern over the epidemic.
Chang Wei Liang, Philip Wee14 Feb 2020
    Photo credit: AFP Photo


    Credit: Uneven COVID-19 impact on Chinese credit
     
    With Chinese growth estimates being revised lower amidst large scale disruptions to stem the spread of COVID-19 in China, corporate profitability is likely to suffer a hit alongside as well. The offshore Chinese credit market has seen spreads expanding, albeit not to an alarming extent. Support measures, including monetary easing and regulatory support for “anti-epidemic” bonds, have likely buttressed investor sentiment.


     
    COVID-19 outbreak has exerted an uneven impact on credit market, with spread expansion falling disproportionately on private sector bonds. On an industry level, retail, food & beverage and transportation companies are likely to experience the most severe decline in business conditions, given the glum consumer mood and restraint in travel. Bonds belonging to these industries have thus seen a discernible increase in their credit spread, although they remain well of August 2019 highs.
     
    Average credit spreads for state-owned enterprises and local authorities are still hugging 1-year lows. Our top ten 2020 credit investment strategy, favouring high-quality SOE bonds, has proven to be well insulated from a more negative Chinese growth outlook.

     
    FX: From cautious optimism to concerned
     
    The cautious optimism earlier this week that the COVID-19 outbreak may be peaking. Dow Jones hit a new record high on Wednesday only to be greeted by a shocking 14.8k jump in new cases on China adopting a new methodology for diagnosis. New research also suggested that the incubation period could be longer at 24 days vs the initial estimate of 2-14 days. In Asia, Vietnam has become the first country outside China to impose a mass quarantine; 10k people in the Son Loi (40km from Hanoi) has been placed into lockdown. In the US, the Bipartisan Commission on Biodefense has warned Congress that the number of COVID-19 cases in the country have been underestimated and under-reported. These US health experts expect the number of US cases to increase from the present 15 in the next 2-4 weeks.
     
    The British pound is unlikely to hold above 1.30 and return lower into 1.25-1.30. Although UK GDP growth beat expectations in 4Q19 (1.1% YoY actual vs 0.8% consensus), it was a weak number. Gross fixed capital formation growth plunged to -1.6% QoQ saar, its worst performance since 2013. Private consumption growth slowed to 0.1% from 0.3%. Headline growth was underpinned by government spending which expanded 2.1% from -0.6% in the previous quarter. Not surprisingly, GBPUSD attempted to trade higher on hopes of more fiscal spending after Sajid Javid resigned as Chancellor of the Exchequer. If so, this would add more pressure on the country’s debt ratings which S&P and Moody’s have warned are at risk from a potentially weaker post-Brexit trade deal with the EU.
     
    We also doubt that GBP can keep bucking the weakness in the EUR which has depreciated below 1.10 to its weakest level since April 2017. The European Central Bank has acknowledged that COVID-19 keeps the overall risks in the Eurozone economy to the downside.

     

    Chang Wei Liang

    Credit & FX Strategist
    weiliangchang@dbs.com

     

    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

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