Market Close Feb 23

Reflation trade reflects economic optimism

Copper rally seen extending; Fed's Powell seen reassuring markets at testimony; Yuan surrenders initial gains  

Reflation trade reflects economic optimism
Thailand's unemployment dipped in the fourth quarter of 2020 from the previous three months as an easing of Covid-19 curbs prompted a revival in economic activity, but a recent uptick in infections poses a risk, the state planning agency said on Tuesday. The unemployment rate was 1.86% in the Oct-Dec quarter, representing 730,000 workers without jobs. The rate hit an 11-year high of 1.95% in the June quarter. The number of workers rose to 38.3 million and was mainly in the farm sector, which benefited from by higher crop prices and government projects. But Southeast Asia's second-largest economy has suffered its deepest contraction in over two decades in 2020 as tourism has been hit hard. Reuters pic from Sept 2020.

(ATF) Hong Kong: Asian markets were in the throes of the reflation trade rally, but inflation worries kept investors on the edge as copper prices rose to 9-1/2 year highs and oil extended gains.

This in turn was reflected in elevated bond yields with the 10-year US Treasuries hovering around 1.36%, now having jumped 45 basis points since the start of the year.

Australia’s S&P ASX 200 jumped 0.86% and Hong Kong’s Hang Seng index added 1.03% but China’s CSI300 retreated 0.32% as worries about rate normalisation continued to weigh.

Regionally, the MSCI Asia Pacific index advanced 0.33%.

Markets in Japan were closed for a holiday.

“As the economy begins to re-open, there will be upward pressure on prices and we are already seeing some bottlenecks emerge in the more buoyant goods sector,” Keith Wade, Chief Economist & Strategist at Schroders, said.

“However, this is likely to be a transitory effect as economies will go into the recovery with significant spare capacity, particularly in the labour market. Although we expect economic activity to rebound significantly in the second half of 2021, interest rates are unlikely to follow,” he added. 

Dollar at 6-week low

The dollar fell to a six-week low as investors’ focus shifted to how US Federal Reserve chief Jerome Powell might respond to resurgent inflation expectations, while commodity-linked currencies hovered near multi-year highs.

But analysts expect Powell, who testifies before Congress later in the day, to provide some reassurance that the Fed will tolerate higher inflation without rushing to raise rates.

“We are in unprecedented times, but the likelihood is that low interest rates will persist long after the world economy has shaken off the pandemic. For financial markets, such an outlook will intensify the search for yield and no doubt create volatility and bubbles as investors chase returns in 'the zero' environment,” Wade said.

Meanwhile, the steepness of the government bond yield curve across global markets continues to keep investors on the edge amid debate about the timing of normalisation of interest rates. 

“Global govvie [government] yield curves continue to steepen, frontloading the optimism that the Pandemic Crisis has an expiry date,” DBS strategists Eugene Leow and Philip Wee said.

They said this reflected the view that large parts of the Developed World will achieve herd immunity in the second half of this year, allowing these economies to normalise. 

“While rates were initially driven up by increased inflation expectations, more recently, there was also a significant reduction in term premium. Optimism is hurting the rates space with 10Y US yields quickly drifting towards our target of 1.5%. We would also emphasize that the pre-Pandemic range is 1.5-2.0%,” they said.

London Metal Exchange’s three-month copper benchmark was trading at $9,064 a tonne and analysts expect the rally to continue.

“We maintain our view that copper could break new record highs in the current super-cycle. Exceptional end-demand from China, the global green wave and decade-low exchange stocks are prime for copper to break out. We see copper testing $10,500/mt (metric tonne) in the next 12 months,” OCBC economist Howie Lee said.

After the People's Bank of China (PBOC) set the yuan's daily midpoint at 6.4516 per dollar, much firmer than the previous 6.4563, the spot yuan surrendered its gains and was at 6.4643 to the dollar in late trade, at similar levels to the previous day.

The offshore yuan traded almost at par with its onshore counterpart, strengthening to 6.4697 per dollar from a previous close of 6.4670.

ATF China Bond 50 Index: New Year bonds optimism sputters out

Also on Asia Times Financial:

Foreign Exchange: Parity for yuan-USD rises 47 bps

Asia Stocks

· Australia’s S&P ASX 200 jumped 0.86% 

· Hong Kong’s Hang Seng index added 1.03%

· China’s CSI300 retreated 0.32%

· The MSCI Asia Pacific index advanced 0.33%.

Stocks of the day

Macau gaming stocks Sands China, Galaxy Entertainment Group, Wynn Macau, Melco International Development and MGM China Holdings rose by 9%-13% after authorities removed all restrictions on visitors from mainland China.

Asia markets copper US stimulus Jerome Powell Thailand