Author: 4. Alina Cho

Source: First Financial Daily

During the Chinese New Year, the global market is constantly on the rise. The former chairman of the Federal Reserve, Yellen, mentioned the possibility of a rate cut. The Asia-Pacific central bank has even proved that the “rate of interest reduction” has arrived. On February 7, the Bank of India announced a rate cut of 25bp (base point); in the past week, the Reserve Bank of Australia, the European Commission, the Bank of England have cut inflation and economic growth expectations, suggesting that the easing is coming.


As early as mid-January, the First Financial News reported on the "Asia-Pacific interest rate cuts are coming", the triggering factor is that inflationary pressures have been greatly eased. In 2018, a number of central banks in emerging Asia-Pacific markets raised interest rates due to currency depreciation and higher oil prices (high inflation). Among them, Indonesia raised interest rates by 175bp, India raised interest rates by 50bp, and Malaysia and South Korea raised interest rates by 25bp.



"We expect the next wave of interest rate cuts in the Asia-Pacific region is coming soon." Eric Robertsen, head of global macro strategy at Standard Chartered, said in an exclusive interview with the First Financial Reporter that the current strong market currencies and falling oil prices should significantly ease the pressure on the central bank. It is expected that major central banks are expected to begin to loosen.


China is at the forefront of this wave of easing - in early 2019, the People's Bank of China announced a RRR cut; on January 23, the central bank implemented a medium-term lending facility (TMLF), known as "directed rate cuts", with operating rates higher than medium-term loans. Convenience (MLF) interest rate discount of 15 basis points.


So, behind this global phenomenon, is the economic weakening the main reason? How will the potential “price cuts” affect investment? Which assets will stand out under the “loose tide”?


The Asia-Pacific Central Bank has started to cut interest rates


The new president of the Bank of India announced the interest rate cut at the first monetary policy meeting after taking office, and started the first shot of the Chinese Lunar New Year emerging market interest rate cut. At present, India's CPI growth rate has dropped to 2.2%, far below the 4% target set by the Bank of India. In the past six years, India’s inflation rate has fallen from an annualized level of 10% to 3.6% last year.


Some institutions believe that the Bank of India had previously overestimated India's inflation rate and was too cautious in cutting interest rates, which inhibited India's economic growth and became the core contradiction between the Indian central bank and the government. Under high pressure, the Bank of India’s former president resigned in December last year, and the new president’s interest rate cuts came as scheduled. It is worth mentioning that the future interest rate cuts in India are still not small.


During the Chinese New Year, global central banks have lowered their forecasts for economic growth and inflation, suggesting that global easing is coming. On February 8th, the RBA not only lowered inflation and the economic growth forecast in 2020, but its chairman hinted that two days ago, the possibility of raising interest rates and cutting interest rates will be more balanced, instead of accentuating as usual. Interest has the upper hand.


"Inflation slowdown is already a global phenomenon." Robertson told reporters that China's inflation has fallen back to around 2.0%, and the PPI fell to a two-year low. In India, the inflation rate has fallen back below 4.0%, and the trend of rising inflation expectations last year due to rising oil prices and the depreciation of the Indian rupee is now completely reversed. In addition, Indonesia's CPI is also stable at the bottom of the two-year range. After a 175 bp rate hike in 2018 to offset the currency weakness, inflation began to ease. At the same time, Robertson also expects the Mexican central bank to cut interest rates this year.


Looking back on 2018, a stronger US dollar, higher US interest rates and a stronger oil price are almost a "fatal" combination for many emerging markets, which has led major central banks to raise interest rates to resist external shocks. Today, inflationary pressures have eased, and the Fed’s attitude has also changed to some extent. On January 28th, Fed Chairman Powell said, "The Fed will remain patient in view of the global economic and financial market conditions and the inflationary pressure in the United States."


"We also thought that this year (the Federal Reserve) will raise interest rates twice (25 bp each), but for now, it may only raise interest rates once this year. We even think that raising interest rates once more this year may be more difficult, plus Interest depends on future economic data, but the most critical inflation data is not at all stressful,” Omhai Sharif, US economic analyst at Societe Generale, told reporters.


Major institutions generally expect that the Fed may raise interest rates 1 or 2 times in the second half of this year, and will not raise interest rates in 2020.


China's easing policy is prudent


To some extent, this round of Asia-Pacific easing cycle can be said to be led by China. Since the fourth quarter of last year, China has continuously introduced monetary and fiscal policies to support the economy. The major institutions believe that although this will be a pleasing cycle of prudent advancement, China will continue to introduce more policies in light of the domestic economic downturn and the pressure of global demand slowdown.


Lu Ting, China's chief economist at Nomura Securities, said that China's credit down cycle will continue in the first half of this year; the “export” will play a role in export data; and the policy based on stimulating small and medium-sized cities will not last. The replacement cycle for durable goods such as construction machinery (such as excavators) has ended; the decline in car sales is likely to continue in the first half of the year.


Lu Ting also said that this infrastructure investment replaced instead of the past loose cycle.real estateIt has provoked the spur of the economy, but since the time of the fourth quarter of last year coincided with the severe cold and the Spring Festival, the start-up situation has been affected, which may slow down the transmission effect of the policy. "We expect that under the pressure of growth, China is expected to increase its easing policy in the second quarter of this year. For example, value-added tax and corporate income tax may have a larger downward adjustment."


In addition, monetary policy will also provide support. Morgan Stanley expects the Chinese central bank to cut 100bp per quarter. And agencies generally expect that there will be about 2 percentage points of RRR space this year. As early as January of this year, in order to alleviate the disturbance of the funds on the Spring Festival, the central bank used a variety of liquidity adjustment tools with different maturities, including RRR cuts, TMLF, treasury cash deposit bidding and large-scale open market reverse repo.


Market trend


Under the easing tide, how is the global stock market going?


In the case of US stocks, despiteS&P 500The index has rebounded nearly 15% from the low point of Christmas, but the safe-haven assets of the United States for 10 yearsNational debtThe rate of return did not rebound at the same time, and even fell 15bp. This seems to indicate that despite the rebound in the stock market, in the context of economic slowdown, safe-haven funds are still pouring into the US debt.


"US stocks and US debt, which market judgment is correct? We choose to vote for US debt." Robertson told reporters, "The best explanation for the rebound in US stocks is that the oversold in December last year, the Fed's attitude to 'turning pigeons' has also accelerated. The process of short covering."


However, the continued decline in the rebound of US stocks. Senior US stock trader Situ Jie told reporters that the first quarter may be the period when US stocks rebounded the most, and US stocks are likely to fall into consolidation again.


"The resistance around 2700~2800 is very big, because there are a lot of people before this point. After September last year, the US stocks fell sharply from 2900 points, and in October it fell to 2760~2800 points, which fluctuated for more than 8 weeks, December. At the time of the official fall, so many investors in the middle of the mountain, "he said, "after all, a 10-year bull market, it is not impossible to consolidate for 2 to 3 years."


In the future, the profit trend will be the top priority. According to the fourth quarter earnings report last year, US stocks are expected to achieve double-digit earnings growth for the fifth consecutive quarter. However, the profit outlook for the first quarter of 2019 is not optimistic. At present, the company's profit forecast for the end of the first quarter is only -1.2%.


As far as China's stock market is concerned, the company had previously recovered the beverages (white liquor) and white power, which were significantly lightened in the fourth quarter of last year, and consumer stocks also ushered in a strong net inflow of foreign capital. However, UBS said that many macro indicators have started to weaken significantly since the fourth quarter of last year. It is expected that macroeconomic pressure will still be faced in the first quarter of this year, and the performance report released in March-April may be significantly revised down.


In addition, a large number of central bank liquidity adjustment instruments will expire after the Spring Festival, the liquidity margin is difficult to continue to relax, and the property market policy is unlikely to adjust quickly. In the short term, the agency proposes to reduce the holdings of high betas such as real estate, liquor and home appliances, and optimistic about industries with stable earnings growth, such as banks and buildings.


(Article source: First Financial Daily)