Mizuho daily – Intelligence & Instinct

“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function” – F. Scott Fitzgerald

Judging by Fitzgerald’s definition, markets must surely be imbued with intelligence.

Seemingly conflicting manifestations were on ostentatious display. First was the coincidence of falling UST yields and a firmer USD; awkward bedfellows at least. Not only were UST yields softer, but they were markedly so, with a flatter UST yield curve (as 10Y slipped 5-6bps to 1.03%, while 2Y was softer fractionally to dip below 0.12%).

Ordinarily softer yields and a flatter yield curve ought to have driven USD lower on “carry” funded by the USD. The exception being “risk off” instinct of  flight back into safe-haven. And to some extent this “risk off” narrative may be substantiated on virus and fiscal woes. Worries about more virulent and  transmissible (UK and South African) strains of coronavirus that may be more resistant to the vaccine is indeed chipping away at vaccine cheer.

And growing concerns about Biden’s USD1.9 trillion fiscal plan being frustrated by Republicans. Either way, a pullback in the “reflation play” is consistent with softer yields, a flatter curve and a firmer USD as commodities/EM currencies pullback from earlier exuberance.

But squaring USD-UST yield disconnect does not absolve dissonance of buoyant equities. While Dow slipped (-0.1%) a tad, S&P500 (+0.4%) and Nasdaq (+0.7%) are up, ostensibly at odds with fiscal shortfall/delay and renewed virus worries/risks.

A closer look at S&P though reveals defensive stocks (utilities, consumer staples, healthcare and real estate) more than offsetting losses in cyclicals, energy and financials; perhaps reflecting the instinct to calibrate flows/reallocation from lower rates and QE liquidity.

The wider point is that “intelligence” cannot be extricated from instinct. And so, risks of disorderly moves may not be removed.

Meanwhile, caution dampens AUD around 0.77, EUR at low-1.21; and buoys USD/SGD (above mid-1.32) and USD/JPY (~ mid-103).

Korea GDP Recovery: External Engines More Resilient

Korea’s growth contracted -1.4% in Q4 (Q3: -1.1%) , corresponding to a smaller 1.1% QoQ lift compared to 2.1% QoQ in Q3, rebounding from Q2 troughs; leaving 2020 down 1%.

The good news is that growth is on a recovery path. But fact is, the recovery remains highly uneven. And divergence between semiconductor-led exports growth drivers and far more anaemic private consumption recovery are likely to persist. Especially as resurgence of Covid-19 cases and tighter social restriction constrain.

Admittedly, Korea has skirted large-scale lockdowns; but distancing safe-guards are nevertheless taking a toll on services sectors; particularly retail, dining and entertainment. What’s more, despite welcome slowdown in new infection in Jan, the economy is not out of the woods yet as a more transmissible and virulent strain proliferates globally.

The resultant subdued private sector domestic demand recovery as such will require extended fiscal support; validating fiscal and extra-budget efforts. With fiscal policy supported by healthcare support at the fore, the Bank of Korea will have more scope to assess the shape and form of recovery without the need for urgent stimulus.

The case for a rate cut from record low 0.50% policy rate is far from compelling, though more targeted credit/liquidity support in some shape or form is not out of the question.

Korean won (KRW) paring (-1.3% YTD) some  of 2020 (+6.4%) gains meanwhile is welcome relief.