Markets Apr 14

Asian markets cautiously higher

Oil prices clung on to recent gains but sceptics say the production cuts will not match the blow to global demand

by Umesh Desai
Asian markets cautiously higher
A display board shows petrol prices at a Tesco store in York, northern England recently during the lockdown to combat the coronavirus pandemic. Concerns about oil prices remain despite the large cut to production. Photo: Oli Scarff / AFP

(ATF) Asian markets are treading cautiously amid worries about the hit to corporate bottom-lines as economic data is expected to reveal huge contractions. Oil prices clung on to recent gains but sceptics say the production cuts will not match forecasts or the blow to global demand.

Brent futures are up 1.5% and WTI is 2.1% higher. In the credit market, sovereign credit default swaps (CDS) are tighter with the Asia IG index 15 bps tighter at 113/118. China’s 5-year CDS has moved in by 9 bps at 38/41 bps and Indonesia has contracted by 32 bps at 180/190 bps.

In stocks, Japan’s Nikkei 225 is up 1.8%, Australia’s S&P ASX 200 is 0.8% higher and Hong Kong’s Hang Seng index has advanced 0.82%. Regionally the MSCI Asia Pacific index rose 1.3%, even as gloomy forecasts triggered aggressive monetary steps and fiscal stimulus measures.

Morgan Stanley estimates the easing measures by G4 central banks would lead to a $7.2 trillion cumulative balance sheet expansion, and on the fiscal front, headline fiscal deficits for G4 and China will expand to 12% of GDP in 2020. It said the headline fiscal deficit in the United States is projected at 18% of GDP in 2020, with expectations of another round of stimulus amounting to $1.25 trillion, which would take the fiscal deficit to 24% of GDP.

'Deep V-shaped recession'

“Moreover, most of the economies have also introduced quasi-fiscal measures such as loan support programs, which suggests the total support to growth would likely be even more sizeable. The aggressive policy response, coupled with the fact that Covid-19 is more akin to a natural disaster suggests that the Great Covid-19 Recession will be a deep V-shaped recession,” Morgan Stanley economists wrote in a note.

China’s trade data showed shipments picked up last month as factories re-opened and domestic demand began to recover, Capital Economics said.

Export growth improved from -15.9% year-to-year in January and February to -3.5% last month in yuan terms. Imports also improved, from -2.4% year-to-year to +2.4%, the research firm said.

“But with economic activity in the rest of the world now collapsing, the worst is still to come for China’s export sector,” Capital Economics said in a note. It said March’s recovery in exports is likely to be short-lived.

“Although supply-side disruptions to factory activity have now eased, foreign demand will slump this quarter as Covid-19 weighs on economic activity outside of China. Imports should hold up better given that domestic demand looks set to stage a further recovery in the coming months. But since a sizeable portion of imports feed into China’s export sector, inbound shipments will also come under pressure.”

Macro research firm BCA Research said in a note that China's stimulus has so far been tepid but that will soon change.

“Chinese policymakers are sending two clear signals that they will aggressively reflate their economy,” they said in a note. “If Beijing is reflating its economy aggressively, the credit and fiscal impulse must accelerate significantly over the coming quarters. If we see greater signs that China is vigorously supporting domestic economic activity, then the global industrial cycle will recover with great alacrity in the second half of 2020. This will be positive for commodities, especially industrial metals, but it will hurt the US dollar and push yields higher. It would also arrest the stimulus-driven outperformance of US equities, due to their low exposure to industrials, materials and financials.”

Overnight, Wall Street stocks reflected some of the economic and earnings concerns with the Dow Jones Industrial Average down 1.39%, the S&P 500 retreating 1.01%, and the Nasdaq Composite off by 0.48%.