Risk appetite recovered in a big way Tuesday, as global equities surged amid more signs the PBoC is prepared to do what it takes to inoculate China’s economy and financial markets from the Wuhan outbreak.
Hong Kong reported its first death from coronavirus, as cases on the mainland exceeded 20,000. Xi, who hasn’t been seen in public since January 28, told the Communist Party’s Politburo Standing Committee on Monday that officials should abandon “formalities for formalities’ sake” and do what’s necessary to contain the outbreak. He also suggested it could threaten social stability. Xinhua said the virus represents “a major test of China’s system and capacity for governance”.
It also represents “a major test” for the PBoC, and they passed it on Tuesday, injecting another 400 billion yuan into the system, on top of Monday’s net 150 billion injection, which was accompanied by a 10bps OMO cut. The Shanghai Composite knee-jerked lower at the open, before recovering as the PBoC’s liquidity injection and news that insurers may buy 100 billion yuan in shares appeared to turn the tide.
The CSI 300 – which, prior to Monday, had only fallen by 7.5% or more on eight other trading days – surged 2.6%.
Meanwhile, Pete Buttigieg decided to trumpet a pseudo victory declaration after what, by most accounts, was an inconclusive Iowa caucus. “So we don’t know all the results, but we know by the time it’s all said and done, Iowa, you have shocked the nation”, he told supporters. “Because by all indications, we are going on to New Hampshire victorious”.
Any signs that the centrists are prevailing over Bernie and Elizabeth Warren would be well-received by risk assets.
Needless to say, not everyone is convinced the turmoil is behind us, especially when it comes to mainland assets in China. Because Monday was limit-down for a massive number of names, it will take time for traders to exit positions. And the market will remain hostage to virus headlines, although state buying is sure to come into play if the rout reaccelerates. Lu Boliang, CIO at Shenzhen Qianhai Daoyi Investment Holdings, told Bloomberg the following about the situation:
It was just panic, panic, panic everywhere. Some people who were planning to sell at the open might have turned buyers today after seeing fewer shares splattered. Prices may be so low that it’s too painful to sell at this stage.
So, that’s nice. The ChiNext, which plunged nearly 7% in Monday’s carnage, jumped 4.8% on Tuesday.
The PBoC’s decision to set the yuan fix stronger than 7 helped too. USDCNH implied volatility fell.
Analysts have spent the last several days reassessing yuan forecasts and their outlooks for the Chinese economy to account for the impact of the virus. Tuesday’s strong fixing is yet another attempt to signal to the market that policymakers are keen to avert any sort of panic – or at least the appearance of a panic.
Nomura sees an opportunity to short the yuan amid expectations of a larger policy response, decelerating growth and growing doubts about China’s ability to make good on its trade promises. JPMorgan, meanwhile, cut its forecast for the yuan to 7.00 from 6.85 by the end of next month, in recognition of “short-term risk bias”. The bank does expect a tepid bounce in the second quarter, though. UBS reckons the yuan will stay offered in the next several weeks. SocGen slashed their growth target for China to just 4.5% on Monday and said they expect a pair of additional 10bp OMO cuts and one 50bp RRR cut in H1. In the same vein, Citi expects another 15bps worth of cuts to OMO rates on top of Monday’s moves.
Irrespective of whether things continue to improve in markets, China will almost surely deliver a cut to the MLF rate over the next week or two, setting the stage for a lower loan prime rate fix on the 20th.
The recovery in Asian risk assets carried over to Europe, and US equity futures rose. OPEC is meeting to decide what – if anything – to do to stem the rout in crude. “Estimating [the] hit to demand remains challenging given the uncertain trade-off between the aggressive policy response and the duration of the outbreak”, Goldman said Monday, on the way suggesting that crude is pricing in a 500k b/d loss in demand in 2020, equating to a 0.3% dent in global growth. Adding in other factors leads the bank to say crude is pricing in a greater than 0.4% hit to world GDP from the outbreak.
UBS sees OPEC and its allies resorting to another 500k b/d cut on top of December’s deal in an effort to support prices, which plunged 16% in January. “We maintain our positive price outlook for 2H 2020″, the bank says
“Regional currencies have suffered, and bond yields have fallen, due to the coronavirus causing significant risk-off mood [but] whether markets will extend the current price action or reverse course in the short term is difficult to ascertain”, SocGen’s EM strategist Jason Daw remarked on Tuesday, on the way to cautioning that while “adding long dollar or long duration risk at these levels is risky… any meaningful corrections are worth fading, as we remain of the view that it is a buy dollar on dips and receive rates on spikes market in 2020”.