China Cuts Loan Prime Rates; Coronavirus Cases Slip; USD Strenghtens

China’s stimulus measures continued at pace this morning, as it lopped ten basis points of the one-year Loan Prime Rate (LPR) to 3.95%, and five basis points of the 5-year LPR to 4.75%. New cases of coronavirus in China fell to just over 300, sparking a new wave of V-shaped recovery optimism in markets this morning. Wall Street yesterday, Australia and New Zealand equity markets this morning all hit record highs with oil rallying hard overnight and palladium making yet another record high.

Before we all get carried away though, Bloomberg reported that the reason that new cases of coronavirus have fallen, is that China has changed its reporting methodology for the second time in seven days. Eliminating those who appear virus-positive after a CT-scan. There are two ways of looking at this. On the one hand, a cynic might suggest China is massaging its data to paint a rosier picture. Something it has been undoubtedly accused of in the past. On the other, one can argue that China is dynamic in its reporting, due to the science coming in from the front line. Expertise it sadly, undoubtedly has.

Unlike Wall Street, and other vast swathes of the world’s financial markets, I am not an expert, or even amateur, epidemiologist or virologist. I will let readers make their own decisions, but I do look forward to the World Health Organization’s unbiased response to the change in methodology.

That said, the rush into ever more risk assets overnight and this morning did have other factors pushing it. The FOMC Minutes highlighted that the committee felt the economy was precisely where it was supposed to be. Although they were monitoring coronavirus, they felt no urge to move interest rates for the foreseeable future. U.S. housing data also put in a strong showing with housing starts falling slightly, but building permits hitting a 13-year high.

Canadian Core Inflation printed at a respectable 1.80% overnight and even Australia had some good news, adding 13,500 jobs in January. More pleasingly, although part-time employment fell by 32,700, full-time jobs rose by 46,200, showing no sign of a China virus slowdown. It is somewhat of a surprise than that the Australian dollar has fallen this morning even as equities jumped to a record high. It is perhaps because of a sense of disbelief from the men down under, with the Employment data notoriously fickle and the Australian Bureau of Statistics often the butt of cost-cutting jokes.

That point of view may have merit with Qantas (OTC:QABSY) today announcing a slashing of flights and a hiring freeze. That follows a swath of airlines globally, such as Singapore Airlines (OTC:SINGY), announcing slashes in capacity on routes that do end or start in China as demand tanks. Indeed, there seems to be a real sense of divergence between the FOMO-gnomes with v-shaped heads of the world’s financial markets, and what is happening in the real economy every day.

Indonesia’s central bank will almost certainly cut rates by 25 basis points today, its fifth in 12 months. A walk around Singapore shows a country in self-imposed coronavirus lockdown. Airlines are slashing capacity globally with China apparently about to take control of the indebted HNA Group (SZ:000616). (It has an airline.) Apple (NASDAQ:AAPL) and Walmart (NYSE:WMT) have issued coronavirus-induced downgrades, and there is a daily procession of company warnings from around the world about factory closures, etc., due to the disruption of global supply lines. Reuters has reported that Russian crude oil exports to China have fallen by 30% in the last six weeks.

If nothing else, it highlights that the chase for yield and a roof over the head of the world’s savings glut remains in full swing. Financial markets would argue that they are “forward-looking,” even if many of them trade like tail-chasing, one-minute macro funds. I hope they are right.

Equities
Wall Street hit new highs overnight after upbeat building permits data, a calm FOMC minutes, stimulus hopes from China and a fall in the rate of new coronavirus infections on the Mainland, despite the change in methodology. The S&P 500 rose 0.47%, the NASDAQ rose 0.87% and the Dow Jones rose by 0.40%, the only one of the three to not hit a new record high.

The picture is somewhat more mixed in Asia today. Falls in the Japanese yen and the Australian dollar have seen the Nikkei 225 surge 1.80% and Australia’s ASX All Ordinaries rise 0.50%. China Mainland stocks liked the fall in the rate of new coronavirus infections and the LPR cuts. The Shanghai Composite has risen 0.45% and the CSI 300 by 0.70%.

The picture was not so happy elsewhere. A surge in reported coronavirus cases in South Korea has sent the KOSPI lower by 0.70%. Meanwhile, two other countries on the coronavirus front-line stubbornly refused to buy into the hype, weighed down by the impact of the virus on their economies. The Hang Seng has fallen 0.90% and the Straits Times by 0.45%.

The perceived progress by China in controlling the coronavirus outbreak should limit losses on even the laggards of the region today. That should set up Europe for a positive opening stanza this afternoon.

Currencies

The U.S. dollar rose overnight following positive housing data and a steady FOMC minutes, with U.S. Treasury yields holding steady in the face of a rampant stock market. The DXY futures rose to a 22-month high of 99.68 with the Japanese yen a notable loser. USD/JPY rose 1.25%, or over 100 points, to 111.20 as investors rotated out of haven positioning.

The apparent impending return to post-virus normality has seen the underlying strengths of the US dollar reassert themselves. Robust domestic data coupled with high developed market yields. That yield differential is making its presence felt in Asia today, with the Australian and New Zealand dollars falling over 0.50%. The lowest level for the AUD/USD since mid-2009, despite a more upbeat mood on China.

The AUD/USD has fallen 50 points to 0.6630 having broken support at 0.6650. The NZD/USD has fallen by 30 points to 0.6355. On a weekly basis, the next significant support for AUD/USD is at 0.6000. Meanwhile, the NZD/USD has weekly support at 0.6200.

Sterling also played catch-up to a wallowing euro overnight as fears of rocky European trade negotiations and being inflation data undermined the Pound. The GBP/USD fell 100 points to 1.2900 from 1.3000 with support nearby at 1.2870. A daily close below 1.2870 implies a further test lower to 1.2800. With coronavirus stealing the headlines worldwide, Brexit and its significance to Britain have slipped from sight. That appears to be changing with GBP/USD seemingly repricing an aggressive negotiating stance by the European Union and the prospects of a pseudo-hard exit at the end of 2020.

The U.S. dollar has also made steady progress against regional currencies. The offshore Chinese yuan (CNH) has fallen, with USD/CNH climbing 250 points to 7.0390 this morning, just below resistance at 7.0400, after China cut its LPR. Assuming the PBOC allows the CNH to keep falling, a move higher through 7.0400 opens up 7.0800 as its next technical target. Officials in China are likely to be wary of the all-seeing currency manipulator eye of Washington DC should either the onshore or offshore yuan approach this level.

That sense of divergence between the world of equities and the real world is prevalent with the Singapore dollar as well. Despite a stimulus budget, a signalled easing by the MAS has seen USD/SGD extend gains this morning. USD/SGD spiked from 1.3950 to 1.4080, before settling at 1.4030 in a volatile morning session so far. The strength of the U.S. dollar against the majors yesterday has given room for the SGD to fall on a NEER basis today. The SGD is at near three-year lows against the greenback. Continued strength in the U.S. dollar elsewhere will see traders continue to test the MAS’ mettle as the city-state continues to price in a deep recession, despite the governments efforts.

Oil
The V-shaped recovery optimism of the equity markets continues to infect the oil markets, despite all the evidence from the real world yelling the opposite. Markets ignored another giant climb in U.S Crude inventories by 4 million barrels, with Brent crude leaping 2.80% overnight to $59.35 a barrel. WTI meanwhile, jumped an equally impressive 2.75% to $53.50 a barrel.

Talk will now inevitably turn to Brent crude reclaiming the $60.00 a barrel mark, and WTI eyeing the $55.00 a barrel mark. Despite my lack of faith in the foundations of the bounces in energy, gas prices, for example, remain anchored to the seafloor, I am not one to stand in the way of strong momentum. Both oil contracts may well reclaim those levels, but with the real economy screaming “Danger Will Robinson,” a sudden fall from grace will be a much more aggressive move than the rally of the past two weeks.

Asia trading sees both contracts unchanged today, with local traders understandably reluctant to buy at the top after such strong up-moves overnight. That approach could, perversely, also explain the price movements higher of the past two weeks.

Gold
Gold refused to bow before a stronger U.S. dollar, a rampant stock market and an easing of coronavirus fears overnight. Despite all the reasons to sell gold, it actually continued rallying, rising 0.60% to $1611.50 an ounce. In the process, it traced out a nice double top at $1612.50 with the January 8th high.

With gold spending most of January and February trading between $1555.00 and $1585.00 an ounce, speculative long-positioning may well have been reduced, as traders grew frustrated by its inability to break $1600.00 an ounce. That break having occurred now, has likely seen an influx of systematic and technical buyers return to the position, explaining partially, the strength it is displaying.

The other factor may be that there is a lot of portfolio money that isn’t buying into the V-shaped recovery hype of the post-coronavirus world displayed elsewhere. Or maybe, it is a combination of the two. What cannot be denied is the strength gold is showing in the face of the usual reasons to sell it.

Gold has seen some profit-taking this morning in Asia and has eased to $1609.50 an ounce. With gold at 6.5-year highs, resistance is nearby at $1612.50 with the next resistance around the March 2013 highs of $1700.00 an ounce.

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