Ahead Today
G3: US Jolts Job openings
Asia: China Manufacturing PMI, Non-Manufacturing PMI, Thailand Current Account
Market Highlights
Brent oil prices rose to US$112/bbl while interestingly we saw a sharp increase in WTI oil prices to US$106/bbl, perhaps an initial sign that energy shortages and the global bid for oil has now more clearly spilled over to the shores of the US. In particular, President Trump threatened further escalation of attacks on Iran yesterday, including critical civilian energy infrastructure, oil wells, Kharg Island, if Iran didn’t re-open the Strait of Hormuz and a peace deal is not reached shortly. Meanwhile, news reports suggest that Iran is pushing the Houthis to prepare for a renewed campaign against Red Sea shipping, contingent upon any further escalation by the US in its war on Iran. This matters greatly as Saudi Arabia has thus far been quite successful in shifting around 6-7mb/day of its oil flows from the Strait of Hormuz to Yanbu port located in the Red Sea, and if there are disruptions in the Bab el-Mandeb Strait we could see an even bigger impact on energy flows including to Asia.
Overall we have through this crisis advocated our clients and readers take a cautious stance and to find opportunities to hedge if levels in markets allow especially on the energy sensitive Asian currencies such as INR, KRW and PHP. These views and recommendations have worked out well so far (see Asia: What if oil prices spike further and Asia: US-Iran negotiations likely to be difficult). This time around the crisis is truly different, in that it is not just about oil prices, but also 1) about potential energy shortages across Asia, 2) about regional spillovers through refined petroleum product shortages, and 3) 2nd order indirect impact through a whole host of channels such as fertilisers, food production, remittances, petrochemicals, and supply chain disruptions including through travel and transportation sectors among many others.
Moving forward, while many of these currencies in Asia have already weakened with greater risk premia being incorporated in them, and as such the risk may be somewhat more two-way right now.
We think the next phase for Asian currencies may be a shift towards concerns around growth and with that greater risk aversion in markets if the Iran conflict prolongs. This will likely mean growth sensitive and current account deficit emerging market currencies will likely show greater magnitude of underperformance moving forward, including the likes of INR, PHP, IDR, and KRW. We continue to think that CNY will show greater relative resilience within our region. From a rates perspective, local currency bond markets in Asia are likely to be under pressure as well despite offsetting impact from slower growth, both because there will likely be need for greater fiscal spending to cushion consumers and households, and also because risk premia will likely stay elevated.