Financial markets will be mindful of economic disruptions caused by the rapidly spreading coronavirus as the number of deaths rose to 813 and infected cases nears the 38,000 mark. Containment measures in China are expected to cause a contraction in Q1 GDP in the world’s second-biggest economy. The resultant disruptions in supply chains and tourist arrivals are causing economic hardship on much of Emerging Asia as well as advanced economies like Australia due to their dependence on China. S&P Global said it would cause a large but temporary drop in China’s GDP. It lowered its 2020 forecast to 5% from 5.7% but raised its 2021 forecast to 6.4% from 5.6%. Capital Economics estimates disruption related to the coronavirus will cost the world economy over $280 billion in the first quarter of this year.
The spotlight has been so focused on the epidemic that financial markets are likely to ignore the strong US jobs data released on Friday. “In a context where the coronavirus still dictates market sentiment amid concerns for global growth and mostly a Chinese growth recovery, NFP [Non-Farm Payrolls data] has taken a back seat and left hesitant markets broadly unchanged, on risk of the mode ahead of the weekend whilst USD [dollar] proves the ultimate safe haven,” said Olivier Konzeoue, FX Sales Trader at Saxo Markets. But he said the positive data confirmed the US job market is firing on all cylinders and the US economy expanding, although it keeps failing to generate wage inflationary pressure. Non-farm payrolls increased by 225,000 jobs in January, dwarfing the forecast of 160,000 made by economists in a Reuters poll.
Coming up this week is testimony by Federal Reserve Chairman Jerome Powell before congressional committees, where he is expected to reiterate the Fed’s view that no further changes in interest rates are needed. Central bank decisions will also be key after surprise rate cuts from Thailand and the Philippines last week. “In the past couple of weeks, policymakers in China, Sri Lanka, Malaysia, Thailand and the Philippines have lowered interest rates. We also now think the central banks of Korea and Taiwan will cut interest rates over the coming weeks,” Capital Economics said in a note.
Highlights of this week’s investment flows include $16.0 billion into bonds, $14.3 billion into equities, and an eighth week into gold, according to BofA Securities. The bond inflows were the eighth largest weekly flow ever and the second-largest weekly flows into healthcare and the largest outflows from Emerging Markets debt and equities in 17 weeks. It said investors were sending “flows to the known as the coronavirus spread continued and following the Iowa debacle”.
“Funds focusing on asset classes that are geographically geared to Asian countries have seen outflows, such as Asian equity funds and local-currency bond funds. In contrast, hard-currency bond funds recorded healthy inflows,” said Barclays analysts in a report. “A prolonged and deepening negative impact on economic activity and commodity prices would challenge current valuations in many parts of the EM asset universe, in our view.”
Companies in focus
Ganfeng Lithium said it will acquire a controlling interest in an Argentinian company which controls one of the largest sources of lithium brine resources globally. The project is expected to become one of the lowest-cost producers in the world. Lithium, sometimes referred to as “white petroleum”, is a key component in energy storage and in recent years demand has soared because of demand from electric vehicles. Despite the present oversupply, and near threefold supply growth expected by 2025, there is a strong argument that further out, as momentum builds, demand could outweigh supply, S&P Global said. “If forecasts for EV [electric vehicle] penetration are to be believed – along with the billions of dollars car companies have sunk or will sink into EV development and production – then lithium demand is set to increase 10-fold over the next decade,” said Asa Bridle, of lithium developer Savannah Resources.
Tata Steel unveiled its third quarter that ended in December 2019. The steelmaker posted a loss in the quarter compared with a profit the previous quarter and in the same period a year ago. Production and delivery of steel rose but EBITDA per ton tumbled as regional steel prices fell, as steel demand was affected by weaker industrial output in its critical markets. But working capital improvements helped it reduce its net debt.
Guoco Group announced its earnings for the second quarter that ended in December 2019. The property and hospitality firm reported an improvement in its cashflow from operations in the quarter and reduction in debt despite falling profits.
Economic data calendar
|Monday, February 10, 2020|
|Japan trade balance/current account|
|China PPI/CPI/FDI/money supply|
|Fed’s Bowman speech|
|EU investor confidence|
|Tuesday, February 11, 2020|
|Australia home loans/ business confidence|
|UK GDP/IP/trade balance|
|EU EC growth forecast|
|US Redbook index/ job openings|
|Fed’s Powell testifies|
|Wednesday, February 12, 2020|
|Fed’s Quarles/ Kashkari/ Harker speech|
|Australia consumer confidence|
|RBNZ rate decision|
|EU Industrial Production|
|Fed’s Powell testifies|
|Thursday, February 13, 2020|
|US CPI/ jobless claims|
|Friday, February 14, 2020|
|Japan foreign investments in stocks/ bonds|
|China FAI/ IP/ retail sales|
|EU GDP/ trade/ employment|
|US retail sales/ IP/ Michigan consumer index|
LAST WEEK’S RATING CHANGES