Markets ratcheting up the risk dial in Asia with the Hang Seng & KOSPI leading the way...
Yields and U.S. futures higher, with oil pushing up alongside them...
JPY the main mover in FX...
All eyes on Yellen today, as she testifies before the Senate Finance Committee ahead of a vote to confirm her nomination as Treasury Secretary...
"Right now, with interest rates at historic lows, the smartest thing we can do is act big.
In the long run, I believe the benefits will far outweigh the costs"
Yellen's 'prepared remarks' have already caught the headlines, although her ability to sell the idea of a large deficit that will be monitored most intently today.
Latest Market News:
Hong Kong stocks are set to close at their highest level since May 2019 as mainland investors continue a record spending spree in the city.
The benchmark Hang Seng Index rose 2.7% in Tuesday morning trade, soaring past last year’s peak. Its rally since late December has been powered by Chinese investors, who are targeting national firms such as China Mobile Ltd. that had earlier sold-off on the imposition of U.S. restrictions.
Signs suggest that mainland buying will continue. The benchmark Hang Seng Index is still cheaper than the Shanghai Composite gauge in terms of price-to-earnings multiples. The Hang Seng China Enterprises Index, which tracks Chinese companies listed in Hong Kong, is the world’s cheapest major index -- despite being one of this year’s best performers.
“It’s time to shift out of A shares and into H shares,” Shanghai Banxia Investment Management’s Managing Director Li Bei wrote on the company’s official WeChat account on Monday. “The true value investor will exchange Kweichow Moutai Co. for China Mobile, and trade cooking oil shares for CNOOC Ltd.”
Mainland Chinese investors have net bought more than HK$10 billion ($1.3 billion) of the city’s stocks for 11 straight sessions as of Monday, the longest streak since the start of the Shenzhen link in late 2016. Some of their favored targets have been firms that saw sharp selloffs recently due to their inclusion on a U.S. sanctions list, including China Telecom Corp. and railway equipment company CRRC Corp.
Tencent Holdings Ltd., one of the heaviest-weighted stocks in the Hang Seng Index, has surged 18% since the beginning of this year to close at a fresh record high Monday. The majority of analysts surveyed by Bloomberg are bullish on the company and continue to raise target prices, with the highest implying a further gain of 29% from Monday’s closing level.
This breakdown (via @trinhnomics) highlights the YTD performance of major indices by region...
China will provide necessary policy support for the economic recovery this year, to avoid a “policy cliff”, as small firms remain hard-pressed amid the pandemic, a senior official at the state planner said on Tuesday.
China’s economy picked up speed in the fourth quarter, with growth beating expectations as it ended a rough coronavirus-striken 2020 in remarkably good shape and remained poised to expand further this year even as the global pandemic rages unabated.
“We will have a good grip over the pace, intensity and effectiveness of macro policies to make sure the economic recovery remains stable and avoid a policy cliff,” Yan Pengcheng, director of General Office at the National Development and Reform Commission, told reporters in an online briefing.
“Considering some micro market entities will still need to undergo a period of recovery - some small firms just started to ‘get well from a serious illness’, while others have yet to regain their stamina - macro policies will continue to maintain necessary support (for them).”
Chinese leaders at a key agenda-setting meeting last month pledged to maintain “necessary” policy support for the economy this year, avoiding a sudden policy shift, pointing to smaller economic stimulus in 2021.
China is likely to cool credit growth and scale back fiscal stimulus this year to help stabilise debt levels, but policymakers are likely to tread cautiously to avoid derailing the recovery, policy insiders said.
Yan said some temporary and emergency measures rolled out during the pandemic, which helped stabilise the economy, cannot last in the long term, and China still need to achieve growth through reforms and innovation.
In addition to policy steps such as interest rate cuts and increased fiscal spending, the government has unveiled some targeted measures, including cheap loans for some sectors and deferred loan repayments for small firms.
Iranian authorities have blamed a novel culprit for rolling blackouts and heavy smog in major cities this winter: illegal cryptocurrency mining.
In recent weeks air pollution in the capital Tehran and other metropolitan areas in Iran has reached hazardous levels, while residents report widespread power cuts.
Winter cold has increased demand for domestic heating, creating a shortage of natural-gas And forcing power plants to burn low-grade fuel oil, contributing to the pollution, the semi-official Iranian Students’ News Agency reported.
But the Islamic Republic News Agency reported that President Hassan Rouhani has instructed his security apparatus to crackdown on another energy-intensive practice: illegal bitcoin farming.
In August 2019 Iran passed a law regulating cryptocurrency in hopes that it could be used to bypass the effects of US economic sanctions. The law allocated 600 MWh of subsidised energy to be used for authorised cryptocurrency mining.
But with the value of cryptocurrency soaring - Bitcoin has increased in value sevenfold since the start of the pandemic to reach a record high of over £30,000 earlier this month - illegal crypto farming has also proliferated in Iran.
Authorities recently closed a licensed Chinese-Iranian crypto farm temporarily, after state media reported it had been consuming 175 megawatt-hour MWh of power.
Rajab Mashhadi, a spokesman for Iran’s electricity industry union, said last week that 1,620 illegal cryptocurrency outfits had been closed, accounting for about 250 MWh of electricity.
But with peak demand reaching 41,000 MWh nationwide, some experts say crypto mining is a drop in the ocean.
“I think the miners are being scapegoated,” said Esfandyar Batmanghelidj, founder of Bourse & Bazaar. “This isn't the real cause of the strain on the network.”
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Brent crude futures edged up on Tuesday as optimism that government stimulus will buoy global economic growth and oil demand trumped concerns that renewed COVID-19 pandemic lockdowns globally could cool fuel consumption.
Investors are upbeat about demand in China, the world’s top crude oil importer, after data released on Monday showed its refinery output rose 3% to a new record in 2020. China was also the only major economy in the world to avoid a contraction last year as many nations struggled to contain the COVID-19 pandemic.
Oil prices have also been supported by Saudi Arabia’s additional supply cuts in the next two months which are expected to draw down global inventories by 1.1 million barrels per day in the first quarter, ANZ analysts said.
Concerns about rising COVID-19 cases globally and renewed lockdowns weighing down fuel demand kept a lid on oil prices.
ANZ analysts flagged concerns about falling fuel sales in India in January from December and rising COVID-19 cases in China and Japan that could dampen oil demand.
“In Europe and the U.S., the slow rollout of vaccines is also raising concerns that a rebound in demand will remain elusive,” the bank said.
The Bank of Japan will likely focus on measures to make its purchases of risky assets, such as exchange-traded funds (ETF), more flexible as the economy comes under growing strain from a spike in COVID-19 infections, a Reuters poll found.
Analysts polled also revised down their economic projection for the fiscal year ending in March on expectations a recent resurgence of coronavirus infections would dent growth.
Economic activity could stall in the world’s third-largest economy from pandemic curbs and the BOJ may have to look at more effective ways to achieve its 2% inflation target as renewed infections force it to maintain its massive stimulus longer, analysts said.
The central bank said last month it would undergo an examination of its yield curve control and quantitative easing policies to seek ways to make them more “effective and sustainable”. Its findings will be released in March while new GDP estimates will be issued at its Jan. 20-21 policy meeting.
“The BOJ may be thinking of correcting distortions caused by its policy that could become an obstacle for maintaining its current framework through Governor (Haruhiko) Kuroda’s term that ends in early 2023,” said Izuru Kato, chief economist at Totan Research.
Asked what steps the BOJ would take when the central bank unveils its findings in March, 31 economists said the central bank would “make its ETF, J-REIT buying more flexible,” the poll conducted between Jan. 7-18 showed.
Eight analysts said the BOJ would revise its three-tiered deposit rate system that applies negative interest rates only to marginal excess bank reserves and two said the central bank would change the 10-year bond yield target to other durations.
The question allowed multiple answers.
The central bank will discuss ways to scale back a controversial programme that buys massive amounts of exchange traded funds without stoking market fears of a full-fledged retreat from ultra-loose policy, sources have told Reuters.
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Treasury Secretary nominee Janet Yellen on Tuesday steps into a new role following more than a quarter-century in government: salesperson for economic policy after years of defending Federal Reserve thinking and actions.
The Senate Finance Committee’s 10 a.m. hearing Tuesday is likely to feature topics from foreign-exchange policy to taxes, but it will also serve as the first congressional forum where lawmakers will vet President-elect Joe Biden’s $1.9 trillion Covid-19 relief plan.
Yellen will tell them that low borrowing costs mean it’s time to “act big,” according to her prepared remarks.
Yellen will need to sell a package that includes a minimum-wage hike and substantial expansion in family and medical leave -- social safety-net programs that have already triggered Republican opposition. Democratic lawmakers, who will soon enjoy majority control of the chamber, are set to press for their own priorities.
This time she comes to Congress as a political appointee in an environment charged by the possible impeachment trial of Donald Trump and the repercussions of this month’s violence at the Capitol.
“We don’t know what kind of salesperson she’s going to be in a political context -- she’s never had to do that before,” said Tony Fratto, who worked at the Treasury and White House during the George W. Bush administration. She will need to “figure out the best way to win support for the administration’s policies,” he said.
Yellen, who’s due to participate virtually in the hearing, will tell the committee that the U.S. economy has been suffering from entrenched inequality -- and that the administration’s longer-term goal will be to create “more prosperity for more people.”
“Well before Covid-19 infected a single American, we were living in a K-shaped economy, one where wealth built on wealth while working families fell further and further behind,” Yellen will say, according to a text of her prepared remarks obtained by Bloomberg News. “This is especially true for people of color.”
On deficit financing...
“Right now, with interest rates at historic lows, the smartest thing we can do is act big,” she’ll say, according to the prepared text.
But Yellen will likely get asked what the safe limit is, now that debt is on the verge of surpassing 100% of GDP.
She will acknowledge her “appreciation for the country’s debt burden,” according to the remarks.
Yellen more broadly may be asked about the Fed’s intention to keep buying large quantities of Treasuries, and whether the central bank is enabling excessive government borrowing.
“She’s going to have to work out a modus vivendi with the Fed that doesn’t look like a conspiracy and is explicable to Congress,” said Adam Posen, president of the Peterson Institute for International Economics.
Yellen, in her testimony, will affirm the U.S.’s commitment to market-determined exchange rates and make clear the country doesn’t seek a weaker dollar for competitive advantage, the Wall Street Journal reported on Sunday, citing Biden transition officials.
Regulation & Taxes
The Treasury secretary also usually has a prominent role in setting financial regulatory and tax policy, although many other officials are involved and can take the lead. Biden’s administration is expected to strengthen scrutiny of financial institutions and he has pledged to roll back many of Trump’s tax cuts.
Yellen will also head the Financial Stability Oversight Council, a cross-agency panel designed to monitor risks. She could face questions on strengthening its powers or oversight, and on whether climate change could be a new area of supervision.
Looking ahead, Yellen's hearing at 3PM GMT looks likely to be the highlight.
Germany's ZEW reading is likely to be overshadowed by the vote on a lockdown extension later today.
Italy's Conte is expected to continue with a minority government, subject to a vote in the Senate today. The result is expected after 17:00 GMT.
Reuters reported that the outcome is highly uncertain but most observers expect Conte to win thanks to absences and abstentions, while falling short of an absolute majority.
That would allow him to remain in office for now as head of a minority government, but in an extremely precarious position if and when he tries to push through any contested legislation.
Netflix, Bank Of America & Goldman Sachs (among others) also report earnings today...