Asia Macro: With COVID-19 in the air, investors look over their shoulders

Currency Markets

The USD continues to rally versus G10 currencies, following weaker-than-expected US core CPI for September that illustrates the lack of broad-based inflationary pressure and the need for fiscal stimulus. That’s providing a dreaded double negative for gold investors this morning in the form of a stronger US dollar and tepid inflation. 

In addition, the pricing of election risk has not been drawn forward – unless you squint hard. Despite reports of widening election polls, there’s not sufficiently strong evidence to suggest markets are now pricing in a faster resolution as the VIX is holding onto the post-election risk premium.

Asia Stocks

Asia stocks are running into a speed bump via the stronger US dollar. But, with Covid in the air, local investors appear to be more concerned with looking over their shoulder for virus headlines than buying dips and those scare heads are likely to weigh on broader markets today as investors are having trouble backburning the implications of another vaccine trial setback. This is even more so without the much comforting US stimulus package safety net that conveniently papers over Covid’s wall of worry and can ease economic pandemic fears.

MAS On Hold

As expected, the Monetary Authority of Singapore left its policy settings unchanged, with the NEER band's slope at 0% per annum and the implied width intact too at -2/+2%. 

USDSGD is rallying very modestly following the MAS’s unchanged decision. Nonetheless, the statement is downbeat, suggesting that USDSGD has scope to shift higher as the central bank keeps the door open to further policy easing, but likely only in extremis: "As core inflation is expected to stay low, MAS assesses that an accommodative policy stance will remain appropriate for some time."

BoK on Hold

The Bank of Korea left its policy rate unchanged at 0.50%, as widely expected. The press conference is due at 11 am SGT.

Australian coal: much ado about nothing?

There have been a few headlines overnight about China's suspension of the import of Australian coal. Is this a big story? Probably not, according to a few Aussie traders on the street.
China has a quota system for coal imports to protect the domestic sector, and importers shot way past their import quotas in the first seven months (on a pro-rata basis) as there was little global demand and prices were low. This meant that in September global coal prices were under domestic prices, which saw Chinese importers try to import more; they could pay to store it offshore and still make a profit vs. domestic prices, despite being up against their limits. 

It’s just the same coal quota story we had last year. Australia's high-quality coking coal is not easily replaced for the coastal smelters, and buying should resume once the quota resets in January.

Oil markets

I find it interesting that China import demand has offset this stimulus gloom as local Asia retail and prop traders play catch up to yesterday's rally. But with Covid in the air, it's bound to be a difficult journey higher – not only from Covid headlines but elevated oil inventories which will continue to be a dead weight on prices over the short-term, dissuading big oil traders from building aggressive long positions ahead of the inventory reports. 

But I suspect oil prices will remain bid on deeper dips due to the likelihood of OPEC curtailment exertions and a Biden election win that could prove to be a short-term bullish catalyst for oil. 

The IEA published its 2020 World Energy Outlook yesterday and warned that it would be 2023 before global oil consumption returns to pre-crisis levels. They also warned that the oil market would suffer a long-lasting blow, even in the most optimistic scenario. When it comes to renewables, they expect solar to "be at the center of this new constellation of electricity generation technologies." That sector has performed strongly in the last few weeks, significantly as Biden has surged ahead in the polls. However, the move faltered yesterday after the US moved to eliminate a loophole on tariffs on double-sided panels.  
 
Staying on the topic of oil, one of the largest drilling companies in the US has warned that the country has permanently damaged its oil and gas reserves via fracking. Wil VanLoh, chief executive of Quantum Energy Partners, said too much fracking had "sterilized many of the reservoirs in North America." In his view, the US would not be able to produce much above 13m barrels a day. Quantum is one of the critical private equity groups that finance shale drilling. These comments could prompt concern about the viability of projects from now on and have repercussions for the high yield bond market.