Weekly: Interim relief
- Some further (but modest) weakness in the USD can be expected in the near term
- We think conditions have aligned for somewhat higher US interest rates
- Improvement in risk sentiments has not followed through in the offshore Chinese USD credit market
From the ECB cutting deposit rates and promising more QE, hints of an “interim” China-US trade deal, mild improvement in sentiment over Iran, and some reduction in the chance of a hard Brexit, the markets have had room to breathe this week, making for a fairly constructive September so far.
Beyond these headline commanding developments, however, are four secular sources of difficulties for the global economy. The malaise presently observed in energy, industrial metals, auto, and electronics sectors reflect slowing demand in China, structural decline in conventional energy usage, and change in consumption trend (e.g. lengthening of phone upgrade cycles, preference for ride hailing instead of owning). Regardless of trade deals and ebbing of political risks, the pressure on sales and earnings will remain for many companies, in our view.
Amidst signs of stimulus efficacy and demand stabilisation in China, it is important keep in mind that Chinese companies have a wall maturity in 4Q and next year, necessitating orderly dollar funding conditions. It is striking that despite worldwide fixed income rallies, cost of dollar funding has not eased lately. Global investor sentiments may not be focused on China credit risks at this juncture, but it won’t take much for this so start commanding news headlines in the coming months
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