- Global markets wait for Monday’s drop in mainland Chinese stocks
- Fed’s preferred inflation measure expected to remain comfortably below target
- U.S. consumer sentiment measures are not yet fully accounting for the virus scare
Global markets wait for Monday’s drop in mainland Chinese stocks — The global markets are waiting with trepidation to see how far the Chinese mainland stock markets will fall on Monday when they reopen for the first time after the 6-session holiday. The mainland Chinese stock markets were closed from last Friday through yesterday (Thursday) for the Lunar New Year holiday and then remained closed today when the government extended the holiday until Sunday.
Chinese stock instruments trading in Asia and the U.S. provide some guidance about where Chinese stocks might open on Monday. However, the proxies are only rough estimates since mainland Chinese stocks could fall much farther on Monday if there is panic and margin selling by domestic retail and institutional investors. Since the Chinese stock market is dominated by retail investors, the reaction could be more severe.
On the more positive side, the Chinese government on Monday will be applying heavy pressure to the so-called “national team” (i.e., state-influenced financial institutions) to provide support for stocks and prevent a meltdown. The Chinese government prior to Monday’s open also seems likely to announce some support measures to bolster investor confidence, such as new fiscal and monetary stimulus measures.
One proxy for how Chinese mainland stocks might open on Monday is Hong Kong’s Hang Seng index, which started trading again on Wednesday after the 2-day holiday on Monday-Tuesday. The Hang Seng index yesterday (Thursday) closed -5.2% lower from its close on the previous Thursday (Jan 23), which was the last day of trading for mainland China. The iShares MSCI China ETF (MNHI), which trades on the Nasdaq, closed yesterday down by a net -5.0% from last Thursday (Jan 23) when mainland Chinese stocks were last open.
The global markets this Monday will be relieved if Chinese mainland stocks fall by only about -5%. A drop if anything more than -5% in China is likely to cause fresh weakness in U.S. and global stocks in their trading on Monday.
The mainland Shanghai Composite index last Thursday (Jan 23), the last session before the holiday, fell sharply by -2.75% since investors knew they were going into the week-long Lunar New Year holiday with the uncertainty of the spreading virus. However, the news on the virus became much worse this week when the Chinese markets were closed.
Since Chinese mainland stocks were last open, the Chinese government has quarantined some 45 million Chinese citizens, restricted travel within China and on its exterior borders including Hong Kong, and extended the Lunar New Year through Sunday. Various global airlines have temporarily halted their flights to China. When the Chinese markets were last open on Jan 23, there were only 830 cases of the coronavirus. Now there are more than 9,692 known cases of the virus and there have been at least 213 deaths.
The U.S. stock market yesterday recovered from morning losses after the World Health Organization said that it is not recommending any restrictions on trade or travel, even though it has now declared an international emergency over the virus. The markets took that as a positive sign that perhaps enough is already being done to curb the virus.
The markets are hoping that Chinese and other government authorities across the world will be successful in curbing the spread of the virus and eventually snuffing it out like they finally did with SARS after eight months. However, much remains unknown about this new coronavirus (2019-nCoV) and the panic level currently remains high.
Fed’s preferred inflation measure expected to remain comfortably below target — The market consensus is for today’s Dec PCE deflator to edge higher to +1.6% y/y from Nov’s +1.5%, but for the core deflator to remain unchanged from Nov’s +1.6% y/y. The PCE deflator is the Fed’s preferred inflation measure.
The current core PCE deflator of +1.6% y/y remains comfortably below the Fed’s inflation target of +2.0%. Moreover, the Fed at this week’s meeting made it clear it would be desirable if inflation climbs above 2%, suggesting that any interest rate hike is a long way away.
The FOMC in this week’s post-meeting statement again referred to its “symmetric” target by saying, “The current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2% objective.” Also, Fed Chair Powell in his post-meeting press conference said that the FOMC is “not comfortable” with inflation persistently under 2%.
Meanwhile, market expectations for inflation remain tepid. The 10-year breakeven inflation expectations rate in the past several weeks has fallen to 1.66% from 1.80% at the beginning of January, mainly because of the coronavirus and expectations for slower global economic growth and inflation.
U.S. consumer sentiment measures are not yet fully accounting for the virus scare — The market consensus is for today’s final-Jan University of Michigan U.S. consumer sentiment index to be unchanged from the preliminary Jan figure of 99.1, leaving the index down by -0.2 from December. The markets are mainly looking ahead to the February consumer confidence figures, which will more fully account for the impact of the virus. The virus only emerged in the general media as a major global problem starting last week.
