Said Lagarde, now are options are few
To complete what you’ve asked us to do
Though growth is “resilient”
It’s clearly not brilliant
And we’ve no more tools in the queue
Meanwhile tales from China reveal
The pain they’re beginning to feel
As tariffs they cut
And more ports are shut
Life there now is truly surreal
Poor Christine Lagarde. Amidst great pomp and circumstance she is named President of the ECB, clearly a step up from Managing Director of the IMF, but finds when she finally sits down that there is precious little to do in the job. Signor Draghi created and used all the tools the institution had in his effort to carry out its mission of achieving an inflation rate of “close to, but below 2.0%”. And he failed dismally in reaching that goal. In fairness, he did save the euro from collapse in 2012 with his famous “whatever it takes” remark, and arguably that saved the ECB from complete irrelevance. (After all, if the euro broke up, what would have been the purpose of maintaining a Eurozone central bank?) But in the end, the Eurozone continues to muddle through with desultory growth and almost no inflation impulse whatsoever. And Madame Lagarde is reduced to giving speeches exhorting governments to spend more money, while an army of economics PhD’s tries to come up with some other way to make the ECB relevant.
This morning this problem was on full display as she explained, yet again, to the European Parliament that the ECB has limited scope to act given the current policy stance. Yet it seems that despite the easiest monetary policy in its history, the positive impact is still missing. This was made clear when Germany reported that Factory Orders for December fell 2.1%, taking the annual decline to -8.7%, its lowest level since the financial crisis in 2009. Fortunately for European equity investors, things like economic growth no longer matter to equity markets, but for the poor folks of Germany, the future continues to look pretty grim. The euro, which had initially edged up by 0.15% ahead of the data release on this broader optimism, has since turned tail and given up those modest gains to sit right on the 1.10 level, unchanged on the day.
The thing is, in the short run, the economic fundamentals seem to point to the dollar continuing its recent strength, although longer term, as long as the Fed continues with QE, I expect the dollar to decline. But the market technicians are looking hard at this 1.0950-1.1000 level as critical support for the single currency, with a break of 1.0950 likely to open the door to a move to, and through, October’s lows of 1.0865.
But while things in Europe may not be looking that great, fortunately the rest of the world has decided that the coronavirus is no longer a relevant issue for investors and equity markets, and thus risk appetite, worldwide continue to make new highs. Yes, the number of confirmed deaths has risen to 562 and the number of infections has grown past 28,000, but the narrative is now incorporating a possible breakthrough in a treatment and vaccine to stop this infection in its tracks. And that would be extraordinary given the usual amount of time it takes to find, and test a cure for some disease.
Meanwhile, as more and more countries restrict travel to and from China, President Xi Jinping gets angrier and angrier that they are fomenting panic. Arguably, they are trying to prevent said panic, but I’m sure that is cold comfort for the Chinese. Of more importance economically is the fact that CNOOC, one of China’s major oil companies, declared force majeure to break a contract to take in a LNG cargo. It seems that the virus has led to a situation where there aren’t enough people available to work the LNG terminals, so there is nothing they can do with the gas. Again, my view is the market is taking this outbreak less seriously than it should, but of course, my view incorporates the idea that central banks cannot prop things up forever.
But for the time being, my view remains in the minority. Equity markets around the world continue to rally sharply, especially after China announced they would be cutting tariffs in half on $75 billion worth of imports as they attempt to live up to the phase one deal. Asian markets led the way overnight (Nikkei +2.4%, Hang Seng +2.6%, Shanghai +1.7%) and European markets didn’t want to miss out with both the CAC and DAX higher by 0.7% this morning while the UK’s FTSE 100 is up 0.4%. And US futures are pointing in the same direction, each up between 0.3% and 0.4%. In fairness, we did see much better than expected data yesterday here in NY, with ADP Employment blowing out at 291K while ISM Non-Manufacturing printed a better than expected 55.5.
All this has led to a growing risk appetite in the FX markets as well as equities. Last night’s best performer was KRW, rallying 1.0% as traders and investors have taken to heart the worst of the coronavirus fears are behind us and Chinese growth should rebound and help South Korea accordingly. Away from the won, however, there has been less movement in the EMG space, with an interesting mix of gainers and losers. It appears THB is suffering from yesterday’s rate cut today, having fallen 0.4%, but despite oil’s continued rebound, the RUB is weaker today by 0.3%. On the plus side, it seems commodity exporters BRL and IDR are the other big winners, rallying 0.5% and 0.4% respectively.
In the G10, the pound is the only currency that has moved more than 0.1% today, falling 0.25%, as talk about the difficulties of the UK-EU trade negotiations continue to garner attention. Otherwise, nada.
This morning’s data brings Initial Claims (exp 215K), Nonfarm Productivity (1.6%) and Unit Labor Costs (1.3%) none of which are likely to excite, especially with tomorrow’s payroll data on the horizon. Instead, FX remains beholden to the broad risk sentiment, which implies higher yield currencies should continue to do well, while those with low rates are likely to suffer.