Chinese government made “injected” some reality into stock markets today, saying that they don’t’ promise any concrete GDP numbers for 2020, mentioning also the significant uncertainty because of which the impact of a number of factors is difficult to predict. Among those factors is probably a second wave of Covid-19 outbreak. One important sign of this was the fact that recently about 100 million Chinese people have been put quarantined in China. Such wave-like virus spread dynamics translates into a bumpy path for economic growth and activity in the near future, which can’t be averted by liquidity injections and “healthy” stock market valuations.
The logical chain can be continued further and, for example, we can conclude that the demand for resources, including energy, will suffer. It was impossible to pull the spring in oil endlessly, in fact, the factor of the pessimistic Chinese leadership, which abandoned the GDP target, was the reason (convenient premise?) for retracement that we see on Thursday. The commodity market as a whole is also quite frustrated with copper futures dipping by more than 2%. The outlook from the government of the second largest economy in the world, which, to put it mildly, calls for preparing for difficulties, in my opinion, will help the bearish impulse to gain some traction, in particular in emerging markets and commodity currencies.
The latest trade data on Asian economies again lowered the bar for the speed of recovery. The preliminary report on South Korea’s foreign trade unexpectedly indicated a strong decline in overseas shipments in May (-20.3% YoY). Sales of cars and spare parts abroad (in particular, to the main markets - to Europe and the USA) remain depressed, and the export of semiconductors has grown. This is baffling update since it shows that there is a permanent blow to consumption of durable goods and lifting lockdowns won’t fix it quickly. The export of Japan and South Korea to China has grown if we consider the monthly dynamics which serves as another evidence that lifting lockdowns won’t lead to V-shape dynamics in activity.
Recent market discussions about the negative rate of the Bank of England and QE are developing now into concrete expectations of another rate cut. Recall that when we talk about negative interest rate, we are not talking about a market rate (since holding cash yields 0% return and it is always better than negative return if we don’t take into account such complications as costs of storing cash), but about the Central Bank's rate on bank reserves. The Bank of England wants to take such a radical step, since the last rate cut from 0.75% to 0.1% appears to not have reached the end loan consumers, particularly mortgage borrowers:
Actually, this dynamics speaks in favor of the need to lower the rate further. The head of the Central Bank, Bailey, quickly moved from the camp of opponents to the camp of supporters of negative rates, said yesterday that such an opportunity was being actively discussed. Against this background, GBP is expected to decline further, the immediate goal is to retest the level of 1.20. I continue to hold bearish position in the pair expecting it to retest 1.20 level:
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