Weekly Asia Risk Monitor

As usual, we’re keeping it brief. Email us at if you’d like to dialogue further on anything you see below.

 

PRICES

 

In Asian equity markets, Australia’s All Ordinaries Index parted a sea of red, closing up +1.6% on a wk/wk basis. In Asian currency markets, the Japanese yen’s +2.6% wk/wk gain potentially sets up another round of intervention. In Asian bond markets, Indonesia’s +20bps wk/wk rise in 2yr yields stands out as peculiar, given the trajectory of Indonesian inflation readings. Thailand’s yield curve narrowed substantially (-32bps wk/wk) and is near inversion. Clearly the Thai fixed income market has become quite bearish on the slope of Thai economic growth.

 

Perhaps the key callout of the week is the move(s) in Asian CDS markets. Though up across the board and across multiple durations, the absolute levels remain rather depressed relative to their European counterparts – i.e. credit market participants aren’t yet expecting global contagion to materially affect the solvency of Asian sovereigns in the event of a potential European banking crisis.

 

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KEY CALLOUTS

 

China

-China’s July economic data came in as expected – inflation peaking and growth slowed at a decelerating rate: CPI accelerated to +6.5% YoY (37-month high); PPI accelerated to +7.5% YoY; industrial production growth slowed to +14% YoY; retail sales growth slowed +17.2% YoY; fixed assets investment growth slowed to +25.4% YoY; new loan growth slowed to +492.6B MoM and -7.5% YoY; money supply (M2) growth slowed to +14.7% YoY.

-Housing transactions cratered in July, falling -30% MoM – more scope for the PBOC to become dovish on the margin.

-China’s trade balance widened amid faster growth in both exports and imports, highlighting a subtle point we continue to make – Deflation the Inflation is very bullish for China’s net export P&L over the near term, due to the fact that export prices are typically more fixed than import costs.

-As lower expectations for further monetary tightening continue to be priced into China’s interbank rates and swaps spreads, we think the credit crunch facing China’s small-to-medium-sized enterprises will begin to wane. While we don’t see a flood of dovishness in sight, on the margin, credit conditions in China should go from “bad” to “less bad”.

-The Chinese yuan is making 17yr highs in both the spot and forwards market as consensus calls for QE3 spur inflation worries – most notably from Chinese officials: “[Additional easing in the U.S.] is highly likely… This may push up commodity costs and cause more hot money to flow into developing countries, including China” – China’s National Development and Reform Commission.

 

Hong Kong

-GDP growth slowed -210bps in 2Q to +5.1% YoY and we see further downside in 2H – especially if Hong Kong’s property market continues to show marginal weakness. We remain the bears on Hong Kong’s financial services and property developer stocks.

 

Japan

-The businesspeople on the ground in Japan see what we see – slowing growth ahead: the outlook component of the Economy Watchers Survey ticked down to 48.5 in July.

-Vice Finance Minister Fumihkio Igarashi confirmed that Japan is ready to intervene again in the FX market to stem the rising tide in the yen – just over a week after their (unsuccessful) record-setting solo intervention. Chief Cabinet secretary Yukio Edano also said that the country is considering measures to help Japanese corporations to cope with the strong yen.

-Current prime minister Naoto Kan and his record-low 18% approval rating may be on the way out the door soon, as the second of his three hurdles to resignation looks to be cleared (passage of the deficit-financing bill). All that’s left is nuclear power reregulation and, by the looks of it, the opposition (LDP) may push that bill along as well just to get Kan out of parliament.

-Finance Minister Yoshihiko Noda is likely to “run” for the soon-to-be open prime minister role in Japan. A Noda victory is likely to be incrementally supportive of growth-negative fiscal policy (higher taxes), which would be incrementally bullish for JGBs.

-PPI accelerated in July to +2.9% YoY.

 

India

-Recently reappointed (through Sept. ’13) RBI governor Duvvuri Subbarao confirmed that the central bank sees the current rate of inflation as “too high” by a double, which more than likely means there’ll be no easing of monetary policy anytime soon in India.

-Local car sales growth cratered in July (-15.8% YoY vs. +1.6% prior). Though hikes are starting to eat away at consumer demand, inflation remains sticky.

-India’s three weekly inflation readings all accelerated to new intermediate-term highs in the last week of July: food (+9.9% YoY); energy (+12.2% YoY); and primary articles (+12.2% YoY).

-Indian corporations are shelving bond deals amid the rupee’s recent declines, which, in turn, puts upward pressure on the spreads of Indian foreign currency denominated debt. Rising domestic interest rates have led Indian corporations to issue a near record amount of external debt YTD – very negative for Indian equities in the event things take a turn for the worse in Europe (weak currency inflates corporate debt burdens).

 

Australia

-The RBA cut its 2011 GDP growth forecast (by -38.4% to 2% YoY) and, more importantly, walked down its long-term interest rate assumptions to flat vs. a previous forecast of a +50bps rise by mid-2013. We continue to see further downside to Australian interest rates over the intermediate-term TREND as growth slows Down Under.

-Consumer confidence ticked down in August to 89.6 (the lowest level since May ’09) while Australia’s unemployment rate backed up +20bps to 5.1% in July. Australia’s ailing economy needs a bone and we think Stevens will deliver the goods (rate cuts) by the end of the year if we are to remain right on the slope of global growth (negative).

 

South Korea

-PPI accelerated in July to +6.5% YoY. We expect most reported input price series to begin trending down over the intermediate term, as Deflating the Inflation continues to play out across the commodity complex.

-The Bank of Korea kept its benchmark interest rate on hold at 3.25% amid waning external and domestic demand.

 

Indonesia

-Real GDP growth came in flat in 2Q and our models see more of the same in 2H.

-Bank Indonesia kept its benchmark interest rate on hold at 6.75%.

 

Singapore

-The Singaporean government cut their full-year GDP growth and full-year export growth forecast, citing slowing U.S. and E.U. growth.

 

Taiwan

-CPI slowed in July to +1.3% YoY alongside and acceleration in export growth and a wider trade balance. While we’d steer clear of open economies such as Taiwan on the long side over the intermediate-term, we are quick to point out that developing Asia by and large is unlike the U.S. and the E.U. in that it doesn’t have massive sovereign debt burdens structurally impairing growth.

 

Darius Dale

Analyst


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