Morning Brief – Prospects

Prospects

The stories this week about day traders on Reddit out muscling Wall Street in specific equities are fascinating. For now at least, this group of Robin Hood traders hold little chance of upsetting foreign exchange valuations directly given that it is the most liquid market on the planet. Blamed in part for the widening disparity between economic fundamentals and markets, the new role of the retail trader is reported to have led hedge funds and major investment firms away from equity markets in the short run. This shift if lasting could lead to an increasing importance of diverging global growth patterns as big money focusses back on fundamentals.

The IMF this week produced a report laying bare its expectations for China and the US economies to outperform the rest of the world. Held back by vaccinations, other emerging markets and the European Union would remain further shy of their pre-pandemic output by the end of this year. Diverging fortunes in the global economy will feed into the foreign exchange market too. The jury is still out on the Chinese Yuan (CNY) whilst Biden and his administration first formulate and later act upon their position towards the nation following the inauguration. This has led to one of the widest sets of forecasts on CNY with analysts across the market most recently predicting anything from a 7.2% fall to a 6.6% climb versus the US Dollar in 2021. Having rallied considerably since the outbreak of the pandemic, the growth story has so far prevailed with USDCNY now sitting comfortably below 6.5.

The roots of the Chinese and US recoveries look very different. The former is expected to outperform (as it proved capable of in the last quarter of 2020) thanks to an impressive containment of the virus. China’s strict and well enforced lockdowns have largely eliminated all domestic incidences of the virus. Ahead of the lunar new year celebrations where the risk of infection will inevitably rise, China has even reportedly brought out an anal Covid test. Having personally failed to reach a conclusive test with the tonsil/nose combination, I’m writing myself out of this new technology…

Coronavirus cases in the US by contrast have raged as the previous administration took little action towards stopping the spread. The US’s fortune of a quicker than average economic bounce back is thanks to the enormous fiscal and monetary support provided to the economy by public institutions. If Biden’s $1.9tn spending program is secured then this would only add to the economy’s recovery. There is one big concern that would upset risk conditions in the future and turn the entire market on its head. In an unusual statement the IMF noted that those countries who are putting aside the concern of over stimulating their economies and high inflation are the ones likely to bounce back faster. If countries do spend their way out of the virus the risks to inflation are non-negligible and could even break the decade long paradigm of ever lower interest rates. This would have huge implications for emerging markets and major currencies alike.

Discussion and Analysis by Charles Porter

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