Clarity on US harsh weather, China and Japan

This month, there will be three pivotal economies to watch closely as they hold the key to how the rest of the year shapes up.

While our focus is on Asia, we cannot ignore the situation in the US and with the Fed. Tapering is well on course at a rate of $10 billion a month, but US economic data has started the year on the back foot.

The disappointing data so far has been blamed on the weather related issues after severe cold temperatures hit parts of the East coast in the US.

Unless we see a steady bounce back in the data, then at some stage this will start impacting growth expectations and in turn emerging markets.

We’ve already had a taste of the potential impact on emerging markets, after some big moves, earlier this year. Just to give a bit of colour to the issue at hand, it is important to establish what drove emerging markets higher in the first place.

An abundance of cheap funds from developed economies has helped fuel big gains for emerging economies over the past couple of years. The Fed’s huge asset purchase program, ultra-low rates in Europe, along with a big effort for Japan to reach its 2% inflation target have all been key factors behind the rise of emerging markets.

However, it was as if the music all of a sudden stopped when the Fed decided to start scaling back on asset purchases. This left governments and central banks in emerging economies scrambling to cover themselves. Naturally, plenty of emerging markets run fairly large current account deficits which make them high risk. Once you throw in external factors such as sovereign (political) risk and accessibility to international investment, it makes it really tricky to pick the right investment destination. Some of the more prominent emerging economies are China, India, Korea, Turkey, Argentina and South Africa.

Focus swings to China

China, the biggest emerging economy of them all has quickly become a concern for the Asian region and once again it has been a currency move that’s driving the concern. Over the past week we’ve seen a rapid weakening of the onshore (CNY) and offshore (CNH) against the USD. The CNY continued to weaken with talk of a widening of the USD/CNY trading band ramped up. There will continue to be concerns about whether or not this is a deliberate shift in FX policy towards a weaker yuan, or perhaps curbing speculation and showing USD/CNY can move both upwards and downwards.

The National Party Congress, which will be held at the beginning of March, has now been tipped to be the event where China might announce a band widening from +/-1% to +/-2%. Comments, by Finance Minister Lou and PBoC Governor Zhou, at the G20 saying that there will be ups and downs in the currency were mainly interpreted to mean the CNY will exhibit increased volatility in both directions. Another concern the investment economy has at the moment is around tightening lending conditions particularly in the property market.

Data in China has been largely disappointing so far this year. While some feel this is a result of the reforms China is working on, many are questioning whether this will get worse before it gets better. Perhaps March will bring some clarity on all these developments out of China.

Japan prepares for sales tax hike

The recent BoJ meeting presented a surprise for unsuspecting analysts as officials took some action without actually expanding the monetary base. No changes were expected from the BoJ meeting though some speculated that some form of action will be taken, due to the disappointing GDP and industrial production figures along with pre-empting the impact of the sales tax hike, which kicks off in April.

The BoJ will double the size of its growth-supporting fund facility and also lengthen two special lending programs by one-year. While this is not full scale easing, it certainly reinforces the BoJ’s commitment to driving the economy. Japan’s officials have remained quite optimistic despite some key economic readings continuing to undershoot their ideal scenario.

A concern that has not quite been addressed is the increasing gap between rising prices and flat wage growth. Perhaps this will force households to borrow or cut savings and still help the BoJ achieve its target. Regardless, March will be a month of positioning for investors ahead of April.  

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