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The Bank of Japan (BOJ), unlike any of its peers, has become a huge player in the country’s stock market. What began as a monetary policy experiment has turned into what some economists describe as a caveat for policymakers about the extent of intervention a central bank may take in propping up capital markets.

Over the past decade, the BOJ managed to gobble up 80% of Japan’s exchange-traded funds (ETFs), accounting for about 7% of the country’s $6 trillion stock market, according to Bloomberg.

Based on the Government Pension Investment Fund’s annual report for fiscal 2020 ended March 2021, the government held more than 47 trillion yen worth of Japanese stocks. GPIF is Japan’s largest public fund investor by assets.

While ETFs in other parts of the world are used to monitor the performance of certain stocks according to industries, Japan has used its ETF investments to control inflation with the goal of spurring economic growth.

The BOJ started employing this strategy in the later part of 2010 when it began acquiring shares listed on Japanese exchanges via ETFs as part of its quantitative and qualitative easing program.

The program to buy ETFs began as a part of the central bank’s purchase of Japanese government bonds, until the BOJ tested stock-fund buying, hoping to boost stock prices, which in turn encouraged companies to spend more on expansions, create more jobs and push inflation higher.

However, six years into the ETF-buying program, the BOJ still wasn’t able to reach its inflation target, prompting Governor Haruhiko Kuroda to introduce negative interest rates to prevent a strong yen that was hurting the country’s export-heavy economy.

As it stands, the Japanese yen is trading at 130 per USD, a 20-year low for the currency, and could be heading for weaker territory without intervention. While a weaker yen has been welcomed by Kuroda, Reuters reported that Japan could be considering currency intervention to stem further weakness in the yen. The Reuters report helped the USDJPY push above a month’s long resistance of 129 per USD.

USDJPY 1H

Aside from stocks, the BOJ has also racked up large amounts of Japanese government bonds totaling 521 trillion yen as of the end of 2021. The level of bond holdings, however, has fallen for the first time in 13 years as the BOJ sought to taper its bond-buying program due to concerns of a looming financial risk.

Where to from here?

Fast forward to 2022, the BOJ is still stuck with a huge amount of bonds and stocks that the central bank may not be able to easily decrease as a sell-off would have adverse effects on the country’s capital markets.

“The bank was surrounded by dead ends. They were cornered into a place where they couldn’t do anything else,” Izuru Kato, president at Totan Research, was quoted by Bloomberg as saying.

Back in 2019, Kuroda defended the BOJ’s ETF-buying program, dismissing concerns that it is distorting influence.

"At present, I don’t think our ETF buying is having any effect on market function… But we continue to watch out to make sure there are no negative side effects,” Kuroda was quoted by the Financial Times as saying.

Most recently in March, as concerns over its stock holdings grew, the BOJ governor said it was premature to debate an exit from quantitative easing including how the central bank could pare its ETF holdings as inflation has yet to sustainably hit 2%.

Kuroda had also hinted that in the event the BOJ decides to wind down its stock holdings, it will employ a strategy that would minimize the BOJ’s losses and any financial market disruption.

"They cannot sell now. Shares will fall for sure... The negative impact would be pretty huge,” Tetsuo Seshimo, portfolio manager at Saison Asset Management, said earlier this month.

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Despite a global boycott of Russia and an international condemnation of the Kremlin’s actions against Ukraine, some multinationals have dismissed demands to exit or scale down their presence in Russia for various reasons and choosing to continue business-as-usual.

The conflict between Russia and Ukraine has dragged on for two months now since Russia started invading Ukraine on Feb. 24. The crisis has led to elevated commodity prices globally, particularly of oil, supply chain disruptions, food shortages and environmental impacts on Ukraine’s air, water and soil.

In the early days of the war, Russia witnessed a vast exodus of global companies that sought to avoid being branded as funding a war against the people of Ukraine.

Corporate exodus

The long list of multinationals that have severed ties with Russia amid the war include PayPal (NASDAQ:PYPL), Ford Motor (NYSE:F), Volkswagen (FRA:VOW), Toyota Motor (NYSE:TM), Boeing (NYSE:BA), Airbus, Diageo (NYSE:DEO), Apple (NASDAQ:AAPL), Samsung Electronics (KRX:005930), Walt Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX), as well as oil majors BP (NYSE:BP), ExxonMobil (NYSE:XOM) and Shell (NYSE:SHEL).

Shell recently started to withdraw its staff from its joint ventures with Russia’s Gazprom over a month after the company said it will withdraw from Russian oil trade.

To date, more than 750 companies have already cut their ties with Russia, according to a tally by the Yale School of Management (Yale SOM).

Defying public pressure

While dozens of companies have already exited or reduced their operations in Russia, a number of firms are still choosing to stay, defying calls to stop funding a war machine.

Privately owned American industrial conglomerate Koch Industries is among them. In mid-March, Koch President and Chief Operating Officer Dave Robertson said the company’s subsidiary, Guardian Industries, "will not walk away from our employees there or hand over these manufacturing facilities to the Russian government so it can operate and benefit from them.”

Apart from Koch, there are about 330 more multinationals are still operating in Russia that are either defying demands to exit or reduce activities or are postponing future planned investment while still continuing substantive business in the country, according to non-profit group Don’t Fund War’s assessment of the Yale SOM list.

Tech companies stay the course

The list includes Chinese tech and gaming giant Tencent (HKG:0700) and Chinese e-commerce firm Alibaba Group (NYSE:BABA). Tencent has avoided taking sides in the war but appealed to users last month to be objective when discussing sensitive topics like the Ukraine conflict. Alibaba, which has built a presence in Russia in recent years, has remained quiet on its stance in the war.

Didi Global (NYSE:DIDI), which has been under intense regulatory scrutiny in China, had quickly reversed its earlier decision to pull out of Russia, saying it will continue to serve drivers and passengers in the market.

Computer manufacturers Lenovo (HKG:0992) and Asus (TPE:2357) have chosen to stay in Russia to sell computer-related products even after their peer Acer (TPE:2353) earlier this month decided to join the global boycott.

Xiaomi (HKG:1810), the second best-selling smartphone brand in Russia next to Samsung Electronics (KRX:005930), has also remained silent about its plans in Russia. The brand forayed into the market in 2017.

Apart from tech firms, global firms including Nestlé (SWX:NESN), Procter & Gamble (NYSE:PG), Pfizer (NYSE:PFE) and Merck (NYSE:MRK) are buying time in Russia during the war. They are either pausing patient enrollment in ongoing clinical trials, scaling back operations and stopping new investments, or halting non-essential imports and exports.

Some experts say it is getting increasingly difficult for dozens of companies in Russia to leave, according to The Washington Post in March.

"This may be one of the moments in history in which proactive disinvestment is the best option… If you can’t move money in and out of Russia in a convertible currency, what’s the point of being there?,” James O’Rourke, a professor of management at the University of Notre Dame’s Mendoza College of Business, was quoted by The Washington Post as saying.

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The USD dollar is not giving up ground against its trading partners. In fact, the US dollar index has just minted fresh 2-year highs, crossing the 102 level for the first time since March of 2020. Investors are waiting with bated breath for definite signs that the US Federal Reserve will be hiking its benchmark rate by 50 basis points in May as they enjoy a little respite from global uncertainty by holding the safe-haven currency.

EURUSD

The EURUSD has failed to generate any gains after the re-election of Emmanuel Macron as president of France. Macron's pro-EU stance, relative to his challenger for the job, Marie Le-Pen, might have been expected to give the Euro a boost after it was revealed he had secured the top position for another five years. Yet, the EURUSD remains pressured by the discrepancy between the US Federal Reserve's rhetoric and the European Central Bank's (ECB). Each is dealing with decades-high inflation, but the Fed is expected to move faster and more aggressively than the ECB.

The EURUSD trades at 1.064 after falling 0.6% on Tuesday.

USDJPY

The JPY has paused its rapid decline against the USD amid reports that Japan and the US discussed implementing a coordinated currency intervention to stem further losses in the yen. The USDJPY has since fallen back to 127 from 128 but is not budging too far from its 20-year low. Intervention may have to be significant to counter the Bank of Japan's ultra-easy monetary policies that sit in sharp contrast to the Fed's possible 50 basis point hike scheduled for May.

AUDUSD

The AUDUSD is one of the week's worst performers, falling 4% amid the sharp drop in commodity prices such as iron ore (which has fallen 9.3% on the week).

The AUDUSD is now trading below 0.7200, after falling 0.6% on Tuesday, and could look to move further lower. However, Australia is about to release its quarterly inflation data, which is supposed to cement the Reserve Bank of Australia's resolve to hike rates in the country for the first time in more than a decade.

GBPUSD

The GBPUSD, today's worst performer, down more than a full per cent, is suffering from poor economic data from the UK. Numerous reports have recently been released that have investors worried about the economic state of the UK. It was just last week that the Bank of England's Governor Andrew Bailey warned about the risks of a possible recession and a slowdown in the UK labour market.

The GBP is trading at 1.269 against the greenback after falling 1.2% over Tuesday.

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Twitter (NYSE:TWTR) is set to announce its first-quarter earnings results on Thursday and some analysts expect the microblogging platform to again incur losses on the back of its increased infrastructure and marketing spending amid tight competition.

Saturated market

The company, once among the most popular social media channels globally, has become old news particularly to young people with the emergence of platforms like TikTok and Snapchat (NYSE:SNAP).

Facebook (NASDAQ:FB) remains the market leader among social networking sites globally in 2022 in terms of the number of monthly active users, while Twitter has lagged far behind WhatsApp, Instagram, WeChat, TikTok, Snapchat, Telegram and Pinterest in terms of the number of users, according to data from Statista.

Stronger market competition over the past years has prompted Twitter to boost its spending on research and development, and sales and marketing over the recent years.

Losses mount

In 2021, Twitter’s R&D expenses ballooned 43% from 2020 to $1.25 billion, while sales and marketing costs surged 32% year on year to $1.18 billion. These pushed the company’s overall costs and expenses up 51% to $5.57 billion in 2021 and resulted in a net loss of $221 million for the whole year.

Still, the figure was down from a net loss of $1.14 billion in 2020 when the pandemic battered the company’s operations. For the first quarter of 2022, Twitter expects GAAP operating loss of between $225 million and $175 million, against an operating income of $52 million in the year-ago period.

Twitter also expects its quarterly revenue to range between $1.17 billion and $1.27 billion, up from $1.04 billion last year. Analysts expect the company to post a 22% jump in Q1 revenue to $1.57 billion, significantly up from the company’s targeted range. The analysts pegged Twitter’s earnings per share for Q1 at $0.33, down 13.2% from last year.

In the fourth quarter of 2021, although total ad engagements fell 12% year over year, Twitter still managed to rake in $1.41 billion in fourth-quarter ad revenue, up 22% from a year prior.

Musk’s $44 billion offer

Ahead of its earnings release on Thursday, Twitter became the subject of an acquisition offer from Tesla (NASDAQ:TSLA) and SpaceX CEO Elon Musk. On Monday, the New York Times reported that Twitter is close to reaching a deal to sell itself to Musk after the latter launched an unsolicited go-private bid worth $54.20, or a total transaction value of ~$44 billion.

That figure represents a substantial premium from Twitter’s current $37 billion market value as of Friday.

Musk has made his plans for Twitter quite clear. Even before the billionaire built a 9.2% stake in the company for an estimated $2.9 billion, Musk has been vocal about how Twitter’s policies quash free speech. However, the Tesla CEO has been notorious in the past for making big market-moving stunts that lead to bigger regulatory concerns for companies that he control.

In his letter to Twitter’s board made public on Friday, Musk said "Twitter has extraordinary potential.  I will unlock it.”

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Next week, the largest market events will centre on inflation, with Australia and the European Area updating the market as to their respective rising consumer prices.

Wednesday, April 27, 2022

Australia Inflation Rate YoY Q1

Australia's quarterly inflation report is due this coming Wednesday. The country has been curiously immune to the worst inflationary pressure seen elsewhere, like the US (8.5%), the UK (7%), and across the ditch in New Zealand (5.9%).

As recorded in the previous quarter, Australia's inflation rate stands at 3.5%. However, it is not expected to remain so low in the next reading. It is likely to be the last inflationary figure before the Reserve Bank of Australia (RBA) moves to increase its interest rate. When the RBA does make this move, it will be the first of its kind in more than a decade.

Expectations are for a 50 basis point hike by the RBA in May, but has the market priced this into the Australian dollar yet?

The AUDUSD is trading a 0.745, after retracing some of the ground it made after releasing the minutes from the RBA's last meeting, where it became apparent that the bank is ready to take its foot off the gas.

AUDUSD D1

Friday, April 29, 2022

EA inflation Rate YoY April 

Inflation in the European Area is at an all-time high as of its last reading in March. YoY inflation in the EA surged to 7.5% from 5.9%, massively overshooting expectations of an already significant rise to 6.6%.

Aprils reading is expected to produce a fifth consecutive record inflation figure, in congruence with notes made by Christine Lagarde, head of the European Central Bank (ECB). Lagarde is anticipating energy prices to remain elevated in the medium term.

Even so, and perhaps imprudently, the ECB is not likely to start raising rates soon.

Perhaps it is wise to consider this another mark against the strength of the Euro, a currency that has been recently grappling with the risk-off environment instigated by Russia's invasion of Ukraine in February.

EURUSD D1 vs Inflation in EA

US tech giants sure to move markets

Additionally, we will be graced with earnings reports from everyone's favourite tech giants. Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFTL), Alphabet (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), and Meta (NASDAQ:FB) will all supply the market with their latest market-moving notes over the course of the week. Alphabet and Microsoft are first to report, on April 26, followed by Meta on April 27 and Apple and Amazon on April 28.

Considering the considerable turmoil that their last earnings reports caused in the market, investors may be cautious of a repeat. Famously, Meta set the record for the largest loss in value ($230 billion) by a US company in one day after the release of its last earnings report.

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Quantitative Tightening

In its most recent policy meeting in March, the US Federal Reserve hinted at plans to shrink its balance sheet at a rapid pace of $95 billion per month, its latest attempt to tame red-hot inflation in addition to its aggressive rate hikes in the coming months.

Fed officials “generally agreed” to slash up to $60 billion of its Treasury securities and about $35 billion of its mortgage-backed securities per month.

But what exactly does the Fed mean with the planned balance sheet reduction?

The Fed’s balance sheet, as with businesses, is a list of its assets and liabilities. The liabilities include US currency in circulation and the reserves deposited by commercial banks, while assets are Treasury securities like notes and bonds, and mortgage-backed securities (MBS).

Quantitative easing

During economic crises like the COVID-19 pandemic, the Fed buys more assets in a policy called quantitative easing. Quantitative easing (QE), also known as asset purchases, are among the tools that the Fed uses aside from interest rate cuts to push inflation to a targeted range.

In March 2020, to help boost money supply and ease the impact of the pandemic on the US financial system and the economy, the Fed went on a large-scale asset purchasing program, buying trillions of dollars in Treasury bonds and MBS.

At the time that the Fed embarked on its QE in 2020, the central bank’s balance sheet only stood at $4.31 trillion. The figure has now ballooned to an unprecedented level of $8.97 trillion as of last week, accounting for about a third of the US national debt.

United States Central Bank Balance Sheet

Quantitative tightening

Conversely, the Fed employs quantitative tightening (QT), or tapering, to normalise its balance sheet by reducing the pace of its asset purchases or outright selling them on the open market. It is one of the tools that the Fed uses aside from interest rates to influence inflation and money supply in the economy.

A move to reduce the Fed’s balance sheet focuses on the assets the Fed holds. Quantitative tightening reduces money supply in the economy as the Fed stops replacing securities once they mature. At a pace of $95 billion per month, the Fed’s asset reduction will shrink the money supply at a pace greater than its attempts in the past.

The last time the Fed attempted to reduce its balance sheet was between 2017 and 2019 when the Fed managed to shrink its balance sheet to $3.8 trillion ($50 billion per month) but was forced to buy back assets again six months later when the pandemic hammered the US economy.

Members of the Federal Open Market Committee expect to begin the QT process again "possibly as early as at the Committee’s May meeting,” according to the minutes of the Fed’s March meeting released in early April.

What the QT means for the stock market

During central banks’ QE processes, interest rates are pushed lower and there is more liquidity in the banking system, encouraging investors to spend more on risky assets and consumers to spend more. In contrast, some analysts expect the Fed’s asset tapering to have a reverse effect on stock markets.

The Fed’s hawkish move may "be a headwind in the face of stocks in particular,” Robert Phipps, a director at Per Stirling Capital Management, said in a recent note.

However, UBS said in an earlier report that the overall direct impact of a QT program "is likely to be limited.”

“Investors should not view it as a structural drag on asset returns,” UBS said, adding that asset tapering is also unlikely to have a big impact on liquidity or inflation.

Impact on USD

QT is seen as a positive sign for the US dollar as the move prices in higher rates when the Fed tightens. Further, as the Fed stops replacing maturing securities, money supply will shrink, possibly pushing the USD higher, if all else stays the same.

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AT&T

Nearly four years after fighting a hard battle to acquire WarnerMedia and accelerating its foray into the media business, AT&T (NYSE:T) has gone back to its roots to focus on being a telecommunications company.

On April 8, AT&T completed the spin-off of 100% of its interest in WarnerMedia, which owns subscription service HBO Max and film production company Warner Bros., and merged it with Discovery Inc. (NASDAQ:DISCA) to form a mega-streaming platform to better take on giants like Netflix (NASDAQ:NFLX), Apple’s (NASDAQ:AAPL) Apple TV, and Disney+ and Hulu by Walt Disney (NYSE:DIS).

Foray into media services

AT&T completed its $85.4 billion acquisition of WarnerMedia, formerly Time Warner, in 2018 about two years after first disclosing the move. The company had hoped to provide seamless media content through its direct-to-customer distribution. It subsequently rebranded Time Warner into what is now known as WarnerMedia.

WarnerMedia owns Netflix rival HBO Max, an over-the-top subscription service launched in 2020 with a ton of exclusive and original contents, as well as HBO classics.

However, in the years that AT&T acquired WarnerMedia, HBO Max still lagged Netflix, which continues to dominate the global streaming platform.

According to tech news platform CNET, Netflix remains the biggest streaming service provider in 2022, with Disney+, Hulu, Amazon.com’s (NASDAQ:AMZN) Prime Video, and HBO Max trailing behind.

The merger of WarnerMedia with Discovery to form Warner Bros. Discovery (NASDAQ:WBD) is expected to up both platforms' game against Netflix, Amazon, and Disney.

Since announcing the closing of the merger, AT&T’s stock has jumped 7% as of Thursday, April 14, but down nearly 14% on a year-on-year basis. Its rival, Verizon (NYSE:VZ) is also trading almost 8% down from a year ago.

AT&T T_2022-04-19_08-51-44
NYSE:T D1

Bullish on AT&T?

Although AT&T’s stock remains below year-ago levels, many analysts remain bullish on the telco’s stock, citing its renewed focus on its core telco operations.

Bank of America analyst David Barden recently reaffirmed his buy rating on AT&T with a $25 price target, saying its shares are undervalued. Barden also noted that the spin-off of WarnerMedia will help ease the complexity of AT&T’s operations.

"With the deal now closed, the dividend reset, and the investor base stabilizing, we believe the stage is set for investors to begin focusing on AT&T’s improving fundamentals," Barden reportedly wrote in a note to clients.

JP Morgan analyst Philip Cusick also issued an upbeat outlook on AT&T’s stock, setting a price target of $22, urging investors to capture the discount on the company’s share price.

Focus on core telco business

Analysts now expect AT&T to double down on its wireless business and expand its fiber optic reach amid intense competition against rivals like Verizon in the broadband space.

In the fourth quarter of 2021, AT&T’s revenue fell to $41 billion from $45.7 billion a year earlier on the back of lower business wireline revenue, which was slightly offset by higher mobility and consumer wireline turnover, and strong revenue from WarnerMedia.

The absence of WarnerMedia’s results will likely weigh on AT&T’s financials in the near term, but its renewed focus on being a telecom pure-play company will make it more competitive against Verizon T-Mobile US (NASDAQ:TMUS) and other smaller players as it expands and improves its 5G wireless networks.

"Going forward, we aim to be America's best broadband provider powered by 5G and fiber, and defined by greater ubiquity, reliability, capacity, and speed,” AT&T CFO John Stankey said in a recent earnings call.

Stankey added that the company will focus on growing its subscribers and accelerating the pace of its 5G deployment.

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The USD has lived up to its classification as a safe-haven currency since the beginning of Russia’s invasion of Ukraine. Other safe-haven currencies, such as the Swiss franc and the Japanese yen, have failed in this respect. Both have lost strength over the past month and a half. The Swiss franc index has fallen 1.2% over this time, while the Japanese yen has plummeted 8.6%.

The physical approximation of Switzerland to the Ukrainian border might explain why the Swiss franc has failed to live up to its safe-haven status. The same reasoning cannot be applied to the yen as Japan has a 5000-mile wide buffer between it and the locale of the conflict. Nevertheless, Switzerland is not the only European country that has been affected by the Ukraine invasion, many of them being direct or close neighbours of Ukraine.

SXY D1 vs JXY D1

Spotlight on the currencies of Ukraine’s neighbours

The currencies of several close and bordering countries of Ukraine have followed a similar pattern since Russia entered Ukraine for its ‘special military operation’ on 24 February 2022.

The Czech koruna, Polish zloty, and the Hungarian forint each spent the period of 24 February until the 7 March considerably weakening against the US dollar. The US dollar strengthened in a range of 9% to 14% against these pairs. The two weeks before 24 February saw gradual but moderate de-risking in these European currencies, with the US dollar gaining in the range of 2% to 3.5%.

USDCZK D1
USDPLN D1
USDHUF D1

Strangely, significant movement was seen on the bookends of this period, on the 24 February, 6 March, and 7 March. All the stranger for the very sharp reversals that took place on 8 and 9 March. This may have been when it became evident that Russia had botched its invasion. The reversals that occurred were not entirely successful in erasing the losses the currencies made since 24 February. The Czech koruna (USDCZK) has fared the best during this affair so far, weakening by only -3% and followed by the Polish zloty (USDPLN) at -4.9% and the Hungarian forint (USDHUF) at -7.8%.

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The more contagious omicron strain of COVID-19 is testing China’s zero-tolerance COVID-19 policy and while many signs underscore the strategy’s adverse impact on the country’s economic recovery, Beijing continues to stick to it, dismissing suggestions that China should learn to live with the virus as other nations do.

Lockdowns in Shenzhen and Shanghai

The resurgence of COVID-19 cases in Shenzhen, dubbed as China’s Silicon Valley, prompted authorities to impose a week-long lockdown of its 17.5 million residents in March. The curbs forced the closure of some factories including those of Apple (NASDAQ:AAPL) supplier Foxconn (TW:2317) and carmakers Toyota Motor (NYSE:TM) and Volkswagen (FRA:VOW).

Shenzhen is also home to tech giants including Tencent (HKG:0700) and Huawei Technologies.

While JP Morgan analysts do not expect the Shenzhen lockdown to have a big impact on iPhone production, some economists have delivered a grim warning on the lockdown in Shanghai. Authorities in China’s financial hub last week extended the lockdown of 26 million people as the city launched its largest public health response in the COVID-19 pandemic era.

ING Bank’s Greater China chief economist Iris Pang warned that the cost of the lockdown in Shanghai and in other areas in China will have a “huge” cost to the country’s growth. Shanghai is tipped to suffer a 6% GDP loss if the lockdown persists in April, leading to a 2% GDP loss for the whole of China.

The lockdown in Shanghai also affected the production of some known brands including Tesla (NASDAQ:TSLA), German auto parts giant Bosch, and Taiwan’s Pegatron (TW:4938), another iPhone assembler.

Offshore Yuan and China H-shares

After trending downward for the previous 7 months, news of the extreme lockdowns prompted the USDCNH to break upwards and out of its channel. The USDCNH, at this point, doesn’t have a clear path back to its previous territory.

USDCNH D1

Conversely, the China H-shares index saw a reversal of fortune on March 16. The China H-shares index follows Chinese incorporated companies which are traded on exchanges outside the country. The boost may have come from investors realising that China would be unlikely to face sanction from the US after failing to condemn the Russian invasion of Ukraine more forcibly in the beginning.

China H-shares index

GDP slowdown

The latest developments in China are widely expected to take a toll on the economy that is already battered by the slowdown in the real estate sector and other downward risks. Everbright Securities recently warned that Beijing’s move to cling to its zero-COVID strategy could knock 10 percentage points out of China’s GDP on a quarterly basis in the first quarter.

Natixis, meanwhile, expects the lockdowns and transport restrictions to slash 1.8 percentage points from China’s first-quarter GDP. Julian Evans-Pritchard, senior China economist at Capital Economics, in late March warned that "the economy is in the midst of its most abrupt downturn since early 2020.”

China is set to release its quarterly GDP data on Monday, April 18.

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In a few months from now, billions of people will be glued to their TVs for the 2022 FIFA World Cup that is set to take place in Qatar. Every four years, soccer’s global governing body gathers teams from over 30 countries for the world’s biggest sporting event that brings in billions of dollars in revenues and other economic benefits (jobs and tourism) for host nations and for FIFA itself.

Economic benefits for host countries

For every World Cup, countries put in their bids to host the event as it is widely seen as beneficial for tourism in the long run. Preparing for the event boosts infrastructure and employment in the run up to the World Cup and attracts tourists during and after the event.

Countries spend heavily in building stadiums as FIFA has had strict stadium requirements since at least 2001. Stadiums for hosting the opening ceremony should have a capacity of at least 80,000 people, while venues slated for quarter-finals should be able to seat 60,000 attendees.

While hosting the World Cup has dubious positive long-term effects on host nations’ tourism and retailing, the impact on employment is undoubtedly transitory as the bulk of job creation is during the construction of stadiums and related infrastructure. Once construction is finished and the World Cup caps off, situations will normalize at host countries and economies will have to wait a couple of years to fully recover the size of their investments in hosting the event.

South Africa, which hosted the 2010 World Cup, spent about £3 billion ($4 billion) on venues and infrastructure costs, but only raked in £323 million in revenue due to lower-than-expected tourist arrivals. South Africa and Brazil, which spent about $15 billion on the 2002 World Cup, are among the host nations that were unable to benefit from their investments.

The South Africa World Cup is regarded by many as a disaster as it triggered protests by workers and by activists that were against the government’s overspending on the project.

Fast forward to 2022, the Qatar World Cup is being met with backlash over how the Gulf state treats its migrant workers. Qatar, albeit small, is one of the world’s richest countries based on its GDP per capita. The oil-exporting country has spent billions on hosting the World Cup that is set to be the first in the Arab world and the second to be entirely set in Asia after the 2002 event in South Korea and Japan.

However, Qatar is facing protests following reports that thousands of migrant workers have died since the country started constructing infrastructures for the event about a decade ago. The 2022 World Cup has also been marred with corruption scandals. Qatar and Russia have been accused by the US Department of Justice two years ago of bribing FIFA officials to award hosting rights to their countries for the 2018 and 2022 World Cups.

Impact on the currency of the World Cup champions

For champions, economic benefits from winning the World Cup are also short-lived. In a report in 2014, Goldman Sachs said the victor outperforms the global market by 3.5% only in the first month after winning. The momentum fades after three months, the bank’s economists said, stressing that the pattern of outperformance is "fairly consistent over time.”

In assessing the World Cup winners between 2002 and 2018, only France registered a slowdown in GDP growth. After winning the 2002 World Cup, Brazil’s GDP jumped 3.1%, faster than the 1.4% expansion in 2001. Italy and Germany also recorded an acceleration in their GDP after their wins in 2006 and 2014, respectively, while Spain’s economy inched up 0.2% in 2010 after contracting 3.8% the previous year.

In terms of the victors’ currencies, the Euro — the currency of most European countries —fared better than the US dollar in 2010 when Spain won the World Cup, but lagged against the USD in 2006, 2014 and 2018 when Italy, Germany and France emerged as champions of the World Cup.

The favorite to win the 2022 FIFA Qatar World Cup is Brazil and could lead to a strengthening in the Brazilian real, which has already had an impressive year. The USD started 2022 at approximately 5.6 reals per US dollar and has since strengthened by 20% to 4.7 reals per US dollar. France (the euro) and England (the pound) are considered the next two favorites with football fans.

USDBRL D1

Who is the real winner in World Cup events?

If both host nations and champions only receive little to no economic benefits from the World Cup, the clear winner of the international sporting event is undoubtedly the organizer, FIFA, itself. FIFA generates income from the sale of TV, marketing, and licensing rights for football events like the World Cup, while the costs for World Cup events always falls on the host countries.

FIFA is expected to rake in $7 billion in revenue from the 2022 World Cup, up from $5.36 billion from the 2018 World Cup and $4.8 billion from the 2014 event.

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