Week-in-brief by Vishnu Varathan, Head, Economics & Strategy | Asia & Oceania Treasury Department | Mizuho Bank, Ltd.,
Of Bulls & Doves
Wall St Bulls came back resoundingly in unison, with Dow up 1.6%, S&P 500, 1.4% and Nasdaq 1.6%. On-going vaccine, stimulus and data/earnings cheer appear to be the go to. But equally, it is hard to ignore the coincident unravelling of “Reddit trades”, with staggering collapse, not mere capitulation, in the Reddit favourites of Gamestop (down ~50%), AMC (~30% fall) and silver reversing a good part of its gains (from the squeeze since late last week).
Temptation to smugly declare a “return to fundamentals” however would be false equivalence. Respite from, and a good degree of reversal, of online retail speculative frenzy does not absolve endemic elevated valuations of asset markets; regardless of QE/low interest rates. But all said, there was no denying that bulls were in the house; which provided some comfort for (10Y) UST yields to gently edge towards 1.1%. USD has edged off highs amid “risk on; allowing EUR to avert sub-1.20 dips, USD/JPY to ease back climb above 105 (with consolidation rather than continued upside) and USD/SGD ease a tad from advance towards mid-1.33.
Markets bulls though were caught wrong-footed by RBA doves; with a surprise expansion and extension of the QE program by another A$100bn. To be sure, this does not speed up QE (from ~A$5bn/wk) so sub-0.76 AUD dip may be short-lived; But contingent on no more dovish RBA cues.
BoT: Fiscal Stimulus Buys Time
With fiscal stimulus to buy time, the BoT is set to maintain record low policy rate of 0.50%, even as the MoF cut 2021 growth forecast to 2.8% from 4.5% citing COVID resurgence.
Fact is, although BOT has not ruled out further rate cuts, the need for immediate support is diminished with the government introducing additional fiscal stimulus. Specifically, some THB210bn (~1.3% of GDP) in cash handouts to low-income households, self-emloyed people and farmers; alongside reduced electricity and water bills for Feb-Mar.
In addition, plans to discount internet cost, 90% reduction in land and building taxes and an extension of liquidity to farmers and smaller business by state banks should also buffer. Upshot: A confluence of factors buy time for the BoT; and non-rate tools feature on standby.
Myanmar Coup: What Next?
In a shocking, but not entirely unflagged, political gambit, Myanmar’s military staged a coup on Feb 1, declaring a year-long State of Emergency citing widespread election fraud. This thinly veiled power grab by the military elites to deny election outcome inevitably drives up political risks and subjects investors to significantly elevated uncertainty.
International condemnation has been swift and expected. But whether this translates into tangible action that reveres the course of events remains highly unclear, if not suspect. For one, the cover of Constitutional legitimacy to prepare for re-elections buys time.
Crucially, implicit support from China and Russia within the UN Security Council set the stage for impeding efforts towards on-the-ground delegations to facilitate a resolution; and could also soften the resolve for, and effectiveness of, coordinated economic sanctions. The latter will be most critical in determining the severity of economic and FX shocks.
In any case the specter of extended military regime and uncertainty are set provoke the worst fears of stagflation-like economic pain and the dangers of steep currency devaluation. Dollarization, both a cause and consequence, will invariably subject MMK to some degree and duration of depreciation pressures; even if the central bank has tools to mitigate. Regardless of the ensuing MMK exchange rate, the single biggest risk in terms of FX markets may be the ability to access USD funding onshore.
Credit Source: Mizuho Bank Ltd