Markets Jun 18

Asian markets cautious but China outperforms 

Australian unemployment hits two-decade high, while China's State Council issues a rare request as the government seeks to ramp up bond issuance

by Umesh Desai
Asian markets cautious but China outperforms 
Volunteers unload boxes of supplies for residents in Bosa, an area with more Covid-19 cases in Bogota, on June 17, 2020. Colombia is on alert for the high occupation of intensive care units amid the pandemic. Photo: Juan Barreto / AFP

(ATF) Asian markets have made a nervous start as the recent surge in coronavirus infections threatens the nascent economic recovery in many parts of the world.

Australia’s employment report for May showed a 227,000 overall fall in jobs, much worse than expected. Unemployment rose 86,000 to 928,000 and took the unemployment rate to 7.1%, its highest since October 2001, when it reached 7.2%.

“The rise in the unemployment rate was further helped by a drop in the labour force participation rate to 62.9% from 63.6%. That suggests many unemployed becoming disaffected with their chances and drifting out of the labour force. Some may not return when the economy revives,” Robert Carnell, ING Bank’s Regional Head of Research in the Asia-Pacific, said in a note. “The size of the figures also highlights the difficult job that all governments, not just that of Australia, have in providing an offset to the impacts of lockdowns.”

Japan’s Nikkei 225 index fell 1.1%, Australia’s S&P ASX 200 index was down 0.82% and Hong Kong’s HSI benchmark was off 0.33%. But China’s CSI300 index was the regional outperformer, rising 0.44% after the State Council vowed to help small and medium-sized banks (SMBs) add equity capital, guide down lending rates, bond yields and financing costs.

'Very unusual'

"We note that it is very unusual for the State Council to directly request lowering government bond yields, suggesting that top policymakers could be uncomfortable with the recent rise in government bond yields when the government needs to ramp up bond issuance," Ting Lu, Nomura’s chief China economist, said. Lu expects an RRR cut is likely to come shortly, perhaps even this weekend.

“The PBoC is very likely to cut the medium-tern lending facility (MLF) rate by 10bp or even higher to guide down the loan prime rate (LPR) soon, but the probability of cutting benchmark deposit rates appears to be fading. Interbank interest rates and government bond yields could peak now and drop in coming weeks. The policy strategy to squeeze banks might be positive for markets and economy first, but could backfire later if non-performing loans rise too fast and the government has to come to rescue banks on a large scale.”

Overnight, the Dow Jones Industrial Average eased 0.65%, the S&P 500 dropped 0.36% but the tech-laden Nasdaq Composite benchmark advanced 0.15%.

Credit markets are also in a risk-off mode as the Asia IG index has moved out by 3 basis points (bps) at 86/87 and sovereign CDS wider by 2-7 bps.

But primary markets are busy as fixed-income investors seek yield in a world where rates are low and unlikely to rise in the near future. Haitong International, Yincheng International, Minor International are among the new mandates which join a handful of other issuers in the region.