Markets Jun 16

Fed's bond-buying plan boosts sentiment

Markets get a boost from US Federal Reserve move to buy corporate bonds and its lending programme, while news emerged of a possible US-China meeting in Hawaii on Wednesday

by Umesh Desai
Fed's bond-buying plan boosts sentiment
US Secretary of State Mike Pompeo, right, will meet top Chinese official Yang Jiechi, left, in Hawaii on Wednesday in the powers' first senior-level talks since tensions skyrocketed over the coronavirus pandemic, The South China Morning Post said. Politico and CNN also reported on plans for the meeting at Hickam Air Force Base next to Pearl Harbour. AFP photo.

(ATF) Asian markets are getting an early bump after the US Federal Reserve announced a corporate bond-buying plan. Sentiment also received a boost after the US central bank launched its Main Street Lending programme

“The Fed’s announcement that it would buy individual corporate bonds (compared to indices only) acted as a circuit breaker for negative sentiment,” DBS economists said in a note.

“While worries about the virus and on US elections in the later part of the year would dent sentiment, we think that market participants may be better off focusing on the real economy. There can be debate on the shape of the recovery, but it should be quite clear that the worst of the economic downturn should already be behind us. Moreover, we don’t think the authorities have the appetite to embark on the large-scale shutdowns we have seen over the past few months.”

There were also reports that US Secretary of State Mike Pompeo will meet a top Chinese official in Hawaii Wednesday in the first senior-level talks since tensions skyrocketed over the coronavirus pandemic. Pompeo will hold talks with senior foreign policy official Yang Jiechi, The South China Morning Post said. Politico and CNN also reported on plans for the meeting at Hickam Air Force Base near Pearl Harbour, which could see a cooling in bilateral ties.

The rebound in the US markets overnight triggered a renewed bout of risk taking in Asia after Monday’s sell-off on fears of a second wave of infections. The Dow Jones average added 0.62%, S&P 500 was 0.83% higher, and the Nasdaq Composite rose 1.43%.

Japan’s Nikkei 225 jumped 3.14% in early deals, Australia’s S&P/ASX 200 soared 3.3% and Hong Kong’s benchmark Hang Seng index climbed 2.66%.

Investors are starting to feel less threatened by the impact of a second wave of infections although the jury is still out as to the speed of the economic recovery.

“A V-shaped recovery it is not, but the direction of travel is a positive one. A second wave of infections – at least during summer months for the northern hemisphere – should not be as troubling as the first,” Seema Shah, chief strategist at Principal Global Investors, said.

She said monetary and fiscal policies remained stimulative across the world and that the ample flow of liquidity means large sums would inevitably flow toward capital markets, acting as a backstop for equities. But she warned that economic realities would create sharp corrections in markets and remove the frothiness.

“We do not anticipate a new bear market and certainly a re-testing of the market lows seems unlikely, but a period of consolidation seems to be in the offing.”

Credit markets are also firmly risk-on with the Asia IG index moving in by 8 basis points at 84/85 and sovereign CDS shrinking by 5-12 bps. The primary market pipeline remains busy with Ping An Real Estate, Chailease Holding, CNPC and PLDT among a horde of issuers out in the market tapping yield hungry investors.