From the Data, Growth is Top Concern Again
If we were to gauge how much market movement is arising from scheduled event risk relative to those unexpected winds from the headlines, I would put greater emphasis on the latter. That can make for difficult trading conditions considering updates like the coronavirus spread do not abide a clear time and distinct categorical outcomes. In this kind of environment, it is more difficult to establish clear and productive trends as there is not a clear thread to be draw enough interest to hit critical mass. Instead, we are left with the risk that otherwise important updates could come at any time – bullish or bearish – which leaves a clear footprint of caution among those participants in the market. Jolts of volatility with unexpected breaks and limited follow through to quench traders’ thirst is instead the norm. It is very possible to adapt one’s own approach towards the markets with this backdrop in mind – even if the result is greater caution, shorter duration and fewer trades.
As far as the data is concerned, there are a number of themes and regions to watch over the week before us. However, I will once again keep my principal focus on growth. That is in part because the ebb and flow of coronavirus headlines are leaving a tangible concern around the cumulative impact on growth – much like trade wars in previous months. Yet, from the economic calendar itself there is plenty to give direct insight on the health of key economies. In the first half of the week, we have Japanese 4Q GDP along with a growth forecast update from the Eurogroup and Bundesbank. The more comprehensive reading though is the February composite, manufacturing and service sector PMI releases from Australia, Japan, Germany, the Eurozone and the US, chronologically. That is a comprehensive and global overview of growth. Will it be market moving? Look to see how receptive the market is prepared to be for this more ‘mundane’ theme.
‘Markets Fall on Coronavirus’ and ‘Markets Rise on Coronavirus’
When it comes to fundamentals, there can be a steep learning curve to make the analysis technique functional in the average person’s arsenal. It isn’t surprising that there is only so much time to dedicate to this venture for many (even when it is their money at stake) or when they encounter too many instances of the analysis lining up without the commensurate reaction from the market. This often leads to statements like ‘these markets don’t make sense’ or an appetite to fall back on the more accessible technical side of the markets. However, I find one of the most important factors in interpreting fundamentals is to find what the most important and influential themes are to the greatest portion of the market and calculating a distinct interest into the equation when one shows itself through the noise of an overwhelming range of various factors pulling at our attention.
As far as the systemic fundamental influences go, it seems that the intense but muddled impact of the coronavirus (COVID-19) still flashes its control over the markets. The warnings of tangible economic toll on the economy from this contagion are added to each week. This past week, the Federal Reserve and European Central Bank reiterated the risk through the official testimony of their respective heads while a number of their members issued individual remarks to much the same effect. Supranational groups are also warning caution. Standard & Poor’s offered the most prominent caution when it cut its 2020 GDP forecast for China by 0.7 percentage points to 5.0 percent while global growth could see its pace trimmed by 0.3 percentage points – China does account for nearly a third of global expansion. The importance of this risk is clear, but the influence is starting to be taken for granted to the point that seemingly every rise and fall is either the direct influence or allowance of this novel risk. In fact, if you check the worldwide search interest in Google Trends the past months containing the worlds ‘stock’, ‘market’, ‘falls’ and ‘coronavirus’ the results are almost exactly the same as ‘stock’, ‘market’, ‘rises’ and ‘coronavirus’ (see the attached picture). This is a short-cut many take in assigning a universal influence on a popular theme, which will inevitably breakdown and draw out the ire of investors attempting to follow the logic. Remember to always evaluate what the dominant fundamental theme is and acknowledge that this influence changes hands while also passing through periods where it dilutes across many different matters.
Intervention in the FX Market Is Not That Uncommon Nor Is It Effective
This is a topic I have touched upon previously in the context of the US Dollar and its supposed purity in the eyes of those that observe liquidity as a virtue. There is little doubt as to the currency’s superior depth as the BIS numbers are very clear on the status. However, that position doesn’t mean that outside forces will not attempt to nudge the market in a perceived favorable direction. Most notable in the hierarchy of critics as to the level of the benchmark currency is the US President Donald Trump who has repeatedly accused global peers (China, Japan, the Eurozone) of depressing their own currencies for competitive advantage while simultaneously lambasting Fed Chairman Jerome Powell for the period of monetary policy normalization that he claims has robbed the Dow of ten thousand points and driving up the Greenback. Given the complicated fallout that would follow attempted manipulation of this particular global financial lynchpin, I will continue to monitor it without my typical deep-seated doubt – as this White House is proving reliably unpredictable and the unexpected carries such a serious impact.
In the meantime, there are more proactive efforts to alter the course of different currencies out in the wild. This past week, Brazil’s central bank let it be known that they had acted (via 20,000 swap contracts) to prop up the Real. The USD/BRL had advanced to record highs five consecutive sessions, leading the group to take action in an effort to break a slide that threatened to gather further speculative momentum. In the context of the average daily turnover of this very actively traded currency (it is one of the BRICS), the scale of the intervention could not be overwhelming the market through sheer volume. Instead, the idea is to shift market sentiment to align to the effort. Japan attempted the same back in 2011 to 2013 to very disappointing result. While Japan’s Ministry of Finance and Bank of Japan are still attempting to passively guide the Yen lower, there desperation has waned and so have their threats. In contrast, Switzerland has maintained the threats against the Franc as EUR/CHF – the focus rate for Swiss officials – has extended a decline to the lowest levels since third quarter 2015. As the markets continue to rebuff efforts of manipulation, believes of monetary policy ineffectiveness grow, pushing countries further into competitive devaluation and restrictive trade-based policies.