Markets in positive mood

Asian markets have opened with a positive tone today, after a relatively quiet news weekend. That is a broad continuation of the positive tone with which Wall Street closed out the week on Friday. Asia itself appears to content to climb out and enter the holding pattern, circling there for an extended period today, waiting for landing slots to open in London and New York.

Earnings season for Q2 in the US kicks off this week, with the largest banks reporting across the week. I expect that trading revenues will outperform once again as market volatility continues. More attention is likely to be given, however, to the big banks’ forward guidance on the global economy and the level of bad debt provisioning. Depending on whom you talk to, S&P 500 earnings are forecast to broadly fall by 30% to 40% YoY, although within that, there will be apparent winners and losers.

Geopolitics had a most welcome, relatively quiet weekend. US President Trump stated that he hadn’t even considered a Phase 2 trade agreement with China. That should be of a surprise to precisely nobody on planet Earth, given the trade and political conflicts with China since its signing, and will not impact markets.

Chinese GDP expected to recover

Alongside earnings data, this week will see a slew of Q2 GDP prints. Concentrating on Asia, China releases its Q2 GDP on Thursday. GDP YoY is expected to recover from its 6.8% fall in Q1, with the consensus being an increase of 2.1%. That, in my mind, is far too optimistic a number. China’s balance of trade on Tuesday may force a reassessment of those bullish forecasts. Either way, a number still in negative territory on Thursday could introduce some long-overdue two-way volatility into mainland and regional equity markets, as well as halting the relentless rise of the yuan in the short-term.

Singapore releases Advance Q2 GDP on Tuesday, with the figure expected to show a lockdown induced collapse of around 35% YoY. The fallout should be limited in local markets, as it is a known known. Singapore’s domestic consumption was weak before the pandemic, and the national lockdown has exacerbated this trend. Singapore’s data is unlikely to improve materially until Q4, and that assumes that world trade continues rebounding, and the pandemic is controlled.

India posts June CPI today at 2000 SGT, with the headline expected to remain elevated at 5.30% YoY. Although an improvement of May, India continues to be in a world of pain. Rising food prices and a weakening currency have created a stagflationary environment in India. There are a number of reasons for this – pandemic flatlining growth, deteriorating credit quality weighing down the banking sector, government finances in a box canyon, and a relentless fall by the Indian rupee.

I am surprised India is not flashing louder danger signals to investors. USD/IDR has bottomed twice in the past three months at 74.00 and has climbed back to 74.95, just below its 100-day moving average. Given the fiscal and monetary constraints in India, the stagflationary environment and the ruption of growth from the pandemic, more weakness in the currency almost certainly lies ahead. India looks set to spend the rest of 2020 in the economic naughty corner.

We have three major central bank rate decisions in Asia this week. The Bank of Japan on Wednesday and South Korea and Indonesia on Thursday. Of the three, Indonesia will be the most interesting. Both Japan and South Korea will remain unchanged, but there is a genuine possibility that the Bank of Indonesia may choose to trim rates by 25bp to 4.0%. Although the currency has weakened slightly, it remains one of Asia’s best performers in Q2.

Similarly, the finance ministry and the Bank of Indonesia (BI) have got away with directly monetising newly issues sovereign bonds without a penalty. A poor showing on Wednesday from the Indonesia trade balance could be enough to tip the BI’s hand. However, in that context, the 14,000-level seen in early June could make the nadir for any rupiah strength for the foreseeable future.

Thursday is likely to be Asia’s highlight also, because, in addition to China GDP, China also releases retail sales, unemployment and industrial production. The data should give a comprehensive snapshot of the progress of the mainland’s recovery. With Covid-19 still rampaging its way through the United States, a positive set of data will be imperative to keep fuelling the global market’s equity rally in the near-term.