Markets May 14

Markets slip after Fed's gloomy view

Fed chairman Powell warned of lasting economic damage from deep and long recessions, saying extra fiscal support could be costly, but worthy if it helps avoid long-term economic damage

Markets slip after Fed's gloomy view
Fed chairman says negative rates are not on the cards. He spoke after Republicans rejected a $3-trillion stimulus measure drafted by House Democrats. File pic by AFP.

(ATF) Investors have turned pessimistic after US Federal Reserve chairman Jerome Powell offered a gloomy picture of the world’s biggest economy and the US Republicans rejected a $3-trillion stimulus measure drafted by House Democrats.

Powell warned in his webcast about lasting economic damage from deeper and longer recessions and said “additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.” He did not address the issue of negative rates in his speech, but said during the Q&A session he remained firm that negative rates are not in the cards.

Kenneth Rogoff, former IMF Chief Economist and a Harvard University professor, said: “If done correctly – and recent empirical evidence increasingly supports this – negative rates would operate similarly to normal monetary policy, boosting aggregate demand and raising employment.”

Japan’s Nikkei 225 fell 0.75%, Australia’s S&P ASX 200 is down 0.91%, Hong Kong’s Hang Seng benchmark is off 1.18% and China’s CSI 300 share index is 0.66% lower.

Overnight, Wall Street's three major indexes closed lower for the second day in a row, the Dow Jones Industrial Average fell 2.17%, the S&P 500 eased 1.75%, and the Nasdaq Composite dropped 1.55%.

Credit markets are watchful, with the Asia IG index trading 2 basis points, while sovereign CDS moved by 1-3 basis points. Chinese developer Zhenro Properties is out with price guidance for a $200 million bond offering, which is expected to price today.

“Chinese property USD credit has priced in excessive risk compared with other Chinese USD credit or global HY bonds. As the pandemic gets under control, China property sales continued to recover since March,” ICBC analysts said in a note. “With the persistently low global interest rate and abundant liquidity, Chinese USD property credit offers attractive risk reward.”

PBoC’s dovish monetary stance along with the ample liquidity in the Chinese markets has some analysts reiterating their bullish view on Chinese government bonds (CGB), where the 3-year to 10-year segment of the curve has been up by 15-18bps since the start of the month.

“We think the bond market selloff offers an opportunity for investors to re-enter the CGB market at more attractive levels,” said DBS Bank analysts in a note underlining the historical steepness of the bond yield curve, considerable premium over USTs and steepness of the bond yield curve relative to the IRS curve.

“We think that the PBoC will maintain a dovish bias in the still challenging global growth environment.”