• Matthew Fotheringham

🌎 Money falls from the skies | The world is shrinking | Is Covid-19 to blame? | 3 Things


February 28th, 2020


Happy Friday!

Welcome to the recession special!


The news has been overthrown with daily updates on the coronavirus. Is anyone else checking the symptoms every time they sneeze? A team in northern Israel claim that they are close to effective treatment, that could be ready within three months.


Did You Know...


A recession is defined as “a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.”


Out of the official 36 members of the OECD (Organisation for Economic Co-operation and Development), 11 are technically in a recession.


Can you name them?


(Answers below).


HKD


Wait, Hong Kong is giving out free money?



The former “Pearl of the Orient” decided to give every locally born man and woman over the age of 18 (7m+ people) HK$10,000 ($1,280).


“Helicopter Money” is not a new concept, the phrase was originally coined back in 1969 by economist Martin Friedman and backed by “Ben Helicopter Benanke” as a possible solution for stimulating the US economy back in 2003. Iterations of this have been used all over the world in forms of Tax breaks but never actually implemented in the way that Hong Kong is going to do it. So


what are the Pro’s and Con’s


Pro’s

  • Does not rely on increased borrowing

  • Doesn’t increase debt

  • Interest rates can remain unchanged

  • Designed to immediately boost spending

  • Increases demand for goods and services


Con’s

  • Unlike QE as a tactic, it is not reversible

  • Cash is not backed against a borrowed asset

  • Central banks cannot use interest rates to recover costs

  • May lead to over-inflation and cause damage to Central banks financials

  • Could lead to a significant devaluation of the currency


The gift is a part of a larger HK$120BN package in an effort to support the flagging economy.


Hong Kong finance minister Paul Chan has warned that the city will face its first budget deficit since 2005 and that it is expected to grow to as large as -4.8% by March 2021.


Chan stated that the objective is "supporting enterprises, safeguarding jobs, stimulating the economy and relieving people’s burden, so as to help Hong Kong tide over the difficulties,”.


The economy has been dragged down by a number of factors, not just Covid-19.


  • US/China Trade War

  • Months of violent protests

  • Slowing global economy


A report back in 2017 showed that Hong Kong had an unhealthy addiction to shopping; I wonder what the majority of people will be spending it on?! Face masks HKD is nearly pegged to the USD and exhibits very low volatility.





JPY


Japan flirting with recession




Japan’s demise from a safe haven to dicing with recession has been a bumpy ride over the past few months. Japan’s economy shrunk 6.3% in Q4 (annualized), far greater than analyst expectations as the Coronavirus weighed heavily on global markets.


Prior to the outbreak, Japan attempted a $120bn stimulus in order to provide a springboard to boost the economy to offset the looming trade wars.  However, the outbreak has dramatically slowed recovery efforts, and the 8.1 million Chinese tourists who won’t be booking their RT tickets to Japan for the Olympic Games won’t help either.


What are the key takeaways?


  • PMI in Japan is in contraction territory

  • Exports fell for the 14th straight month

  • Consumer confidence is at a low.


Now with schools shut in Japan and the country on effective lockdown, economic activity is certain to decline.


Over the last 4 years, USDJPY has exhibited fairly high volatility, translating to a VaR(95%) of 13%. While the volatility has subsided quite a bit, JPY’s safe-haven status has likely driven the JPY up from 112 to 108/USD. Why JPY is a safe haven is a difficult question to answer. With a shrinking and aging population, and public debt exceeding $11 Trillion (more twice the GDP, and not even including pension obligations), it’s a mystery to us.



CNY


Wuhan the self-fulfilling prophecy




The word “recession” has been on the tips of many-a-tongue over the past couple of months and many believe that Covid-19 may indeed be the catalyst.


When we were first introduced to the Coronavirus Virus back in 2019 (now officially named Covid-19 by the WHO) you wouldn’t have been alone thinking that this was a containable disease that wouldn’t affect you… Well clearly that is no longer the case; Equity markets are in disarray, supply chains have stopped, cruise ships have been quarantined and face masks are sold out. For those that would like a reminder of how we got to where we are today.




But the World was already shrinking though...so did the world really catch the flu or is there more to it?


Some of the world’s largest economies have been on the brink of a recession for some time:


  • Japan, the world’s 3rd largest economy, shrank by a whopping 1.6% in Q4. On the back of a sales tax hike and huge Typhoon.

  • Germany’s output had already begun to contract prior to the outbreak and has only worsened, supported by poor sentiment numbers from the ZEW and BREXIT woes.

  • Hong Kong is technically in a recession -2.9% which has pushed the government to extend a HK$120B stimulus package.

  • Singapore with a growth of just 1% is likely to follow them

  • India’s economy is doing well, with accelerating growth in Q4 carrying over to 2020. However, social unrest and the effects of lower Chinese trade may prove a drag on the economy.


So although Wuhan is not directly to blame it could absolutely be argued that it was the straw that broke the camel’s already fragile back. With many economists believing the market simply wasn’t able to cope with a shock of this magnitude.


Currency volatility is well and truly back, interest rate decisions and central banking speeches are highly scrutinized for any indication of dovish or hawkish comments. The majority of currencies are dropping against the USD as investors look towards the traditional safe havens.


USD Index. Currently at 98.5, near 4 yr high

CAD GBP EUR AUD NZD ZWL


In Other News


  1. Canada meets with the locals to end blockades

  2. The UK push for a binding deal with EU financial markets

  3. Markets price in an EU rate cut in December 2020

  4. NZ and Oz in war of the words over deporting criminals

  5. Has Zimbabwe been secretly printing cash?


This Weeks Economic Data Calendar



Keep An Eye On Next Week




Feature Article


Currency hedged share classes and cross border distribution




This week, guest writer Atillio Veneziano worked with the Deaglo risk strategy team to discuss the ingredients to successful cross-border distribution, more technical and product-specific in nature, which sometimes might end up overlooked by fund promoters... READ MORE


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Currency Heat Map

This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.




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Quiz of the week


OECD countries that are in a recession.


  1. Czech Republic

  2. Denmark

  3. Finland

  4. France

  5. Japan

  6. Latvia

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