A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
A Rose by Any Other Name…
Share this story:
Andrew Kositkun Foreign Exchange Head Trader
It has been said that a rose by any other name would smell as sweet. If this is the case, then risk by any other name is just as risky.
Towards the tail end of 2019, some parts of the Chinese economy started to turn towards the upside. Case in point, auto sector output in November rose on the year for the first time since June 2018. Profits in the electronics industry have rebounded strongly as global smartphone and semiconductor demand has rebounded. Additionally, the labor market should receive a boost from the expected trade truce between the US and China. Granted, the Phase 1 deal leaves much unresolved between the US and China, but the expectation is that the US doesn’t escalate trade tensions in front of the 2020 presidential election.
As such, the risks from trade appear to have faded, only to be replaced by the risk from elevated debt. To be sure, elevated debt has long been an issue in China, but the acute risks from tariffs pushed debt concerns to the back. Heading into 2020, this all could change.
On a trailing 12 month basis through last October, the return on assets (3.7%) from state controlled enterprises was below the average bank lending rate (6.0%). Moreover, heavily indebted property developers, which have been hit by China’s crackdown on shadow banking, have become more reliant on “preselling” houses. With the real estate market cooling, this source of funding is starting to dry up.
To be sure, the outlook for 2020 in China is seen, on balance, as positive, but the elimination of trade risk isn’t an all clear but simply a clearing of the path for other risks to take center stage.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
The US merchandise trade deficit narrowed in November to the smallest shortfall in three years as exports increased and imports decreased. Details of the report showed US retail inventories fell 0.7% MoM versus expectations for a 0.1% rise and wholesale inventories flat MoM versus expectations for a 0.2% rise.
Japan will be on holiday from December 31 through January 3. During recent holiday periods, USDJPY experienced sharp spikes in appreciation as liquidity was thin with Japanese markets closed. While it is tempting to think history would repeat itself, it is important to remember that things are different this time around versus a year ago. Last year, the Nikkei 225 index fell more than 15% and market sentiment and conditions were poor. That is not the case this year. Additionally, USDJPY short positions are less than half of what they were a year ago. Thin market conditions certainly make larger movements easier, but it’s unlikely that we will see the same magnitude of moves in the upcoming New Year holiday as we saw in early 2019.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend
Here's what this indicator is saying about US stocks right now. ACTIVE INVESTOR WEEKLY EDITION: January 21, 2022 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: January 21, 2022 Bollinger band stock signal Here's what this indicator is saying about US stocks right now. Read more CHART OF THE WEEK Inflation and corporate consolidation US industries have become