Weekly: Playing with fire


A plethora of factors beyond economics will likely dominate the market narrative this year.
Taimur Baig, Duncan Tan10 Jan 2020
  • Bushfires in Australia and US-Iran tensions - 2020 has begun with plenty of heat
  • Oil and gold prices have turned volatile, but overall macro risks have not risen appreciably
  • Unless hostilities worsen, the narrative of a modest trough in global manufacturing remains
Photo credit: AFP Photo


Non-economic factors driving markets

The massive bushfires in Australia, partly driven by unusually dry conditions caused by climate change, has brought to the fore the costs of dealing with the ongoing climate crisis. As elucidated by our 2020 outlook’s title, “Beyond Economics,” developments like these are likely to increasingly drive market forces.

Last week’s US orchestrated assassination of an Iranian general and subsequent market gyrations also illustrate the power of election considerations and geopolitical rivalry to influence the market narrative.



These developments have generated plenty of heat in the news, but market risk perceptions rose only modestly. For instance, the spike in oil around the event has been modest.

It is too early to look past the tensions in the middle-east, but we would not want to ignore other key pipeline developments.



Global dataflow. We continue to expect a trough in glboal electronics and auto cycles, potentially boosting Asian exporters. Recent global PMIs already support the emergence of this outcome.


Additionally, the US seems to be past the soft patch encountered in the early part of Q4; a few more good data points will hasten the rise in long-term yields. Low interest rates, strong asset market gains, record high employment, and sustained wage gains could create room for upside economic surprise.

Capital flow to Asia. Led by China, India, Indonesia, and South Korea (and Taiwan in recent months) Asian economies are seeing a turnaround in capital inflows. We see this as supporting our hypothesis that 2020 will be characterised by flows from expensive developed markets to EM Asia.

Global liquidity. A trend that began midway last year has taken a major lower-for-longer dimension. Policy normalisation is being discounted by the markets almost entirely for the time being. The risk however is that strong US data, combined with progress on the trade front with China, ignites the reflation trade, pushing up long term rates and tightening dollar funding conditions worldwide.


US elections. Like him or not, Donald Trump has been good for US markets. As Democratic primaries begin, any rise in the probability of election of candidates like Elizabeth Warren and Bernie Sanders, who are pushing forward a tough stance on regulation and taxation, pose challenges to the market’s present exuberance.


To read the full report, click here to Download the PDF.

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
taimurbaig@dbs.com



Duncan Tan

FX and Rates Strategist - Asean
duncantan@dbs.com

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