Trade of the Day: Risk assets dumped – stocks, EM currencies tumble; gold, US Treasuries rally.
Quote of the Day: “The economy appears to have weathered October’s sales tax hike better than many had feared. But with industrial production set to record the steepest quarterly fall since the Great East Japan Earthquake and global growth likely to disappoint, we still expect Japan’s GDP to shrink this year,” said Marcel Thieliant, senior Japan economist at Capital Economics. He forecast Japan’s economy to shrink -0.2% this year.
Stock of the day: BYD Electronics rose as much as 15% after influential Apple analyst Ming Chi Kuo of TF Securities said BYD Electronic will replace Quanta Computer as the sole assembler of the iPod touch in 2020, as well as obtain at least 10-20% of non-cellular iPad orders.
Number of the Day: $1.5 trillion: The amount of unspent cash held by private equity companies worldwide at the end of 2019, according to financial data provider Preqin.
Tip of the Day: “We raise our index targets for MSCI Asia ex-Japan to 725 and TOPIX to 1900 to reflect the better EPS backdrop. At 13.7x forward P/E, Asian equities are already trading above their long-run averages, suggesting an earnings recovery and low rates are being priced-in. While we see scope for relative valuations to improve if bond yields remain well-anchored, our base case is that multiples hold as bond yields remain low and earnings recover. A stronger recovery – if that brought about higher yields – could pose a challenge to multiples,” said Niall MacLeod, APAC equity strategist at UBS. He also raised his 2020 GDP growth forecast for China to 6% from 5.7%.
Financial markets retreated on Friday after the US military killed Qasem Soleimani, the head of the Islamic Revolutionary Guard Corps-Quds Force, an Iranian army unit, which caused a surge in oil prices and a general souring of risk appetite amid fears of escalating tensions in the Middle East.
The MSCI Asia ex-Japan index fell 0.2%, China’s CSI 300 index was down 0.18% and the Hang Seng index eased 0.3% as telecoms, property and banking sector stocks slid. Japanese markets were closed for a holiday.
“The big net oil importers would be impacted the most. Higher import costs may result in inflationary pressures, which would likely impact domestic consumption and restrict or reduce central bank’s ability to do policy easing,” said Carlos Casanova, Asia Pacific economist at Coface after oil prices rose over 4% as the killing stokes concerns about a widening conflict in the oil producing region.
“In some markets, higher oil prices may also result in depreciatory pressure, especially in the case of India, Philippines, South Korea, Taiwan and China,” he said.
The Indian rupee fell 0.46%, the Korean won was down 0.76% and the Philippine peso was down 0.69% on Friday as their economies are most vulnerable to any spike in oil prices. Still, the potential impact on inflation and therefore on interest rates were considered marginal as the absolute levels were low and within the targeted ranges of the regional central banks.
“What matters for inflation is the year on year change in oil prices. Despite the jump overnight, oil prices are still below US$70 per barrel, which is similar to the level they were at in the first half of last year. So in year on year terms, oil prices inflation is likely to remain contained,” said Gareth Leather at Capital Economics.
Safe havens US Treasuries and gold benefited from this escalation of tensions which followed an unprecedented attack on the US mission in Baghdad. US President Donald Trump had tweeted “They will pay a very BIG PRICE! This is not a Warning, it is a Threat” ahead of Friday’s killing.
US 10-year Treasury yields, which move inversely to prices, fell 6 basis points to 1.82% and gold spot prices jumped 1.3% as investors braced for an Iranian response.
“Oil supply shock is never good news to Asian economies. We will also have to see if the US electorate can accept another major war in the Middle East before the November election. A lot will depend on Iran’s certain retaliation and the US response to it,” said Homin Lee, Asia Macro strategist at Lombard Odier.