Markets Jun 24

Recovery momentum doubted after recent market gains

Beijing fast-tracks testing as latest infection outbreak brought under control; Doubts emerge about recovery momentum; RBNZ seen going negative after keeping rates steady

Recovery momentum doubted after recent market gains
A woman walks with her shopping in Auckland on June 19, 2020. New Zealand's economy suffered its biggest contraction in 29 years during the first three months of the year, official data showed, with worse expected as the coronavirus pandemic's full impact emerges. Photo: Greg Bowker / AFP

(ATF) Investors are treading water this morning amid a spike in coronavirus infections in many countries and with doubts creeping in about the sustainability of the economic rebound from the pandemic.

The Nikkei 225 is marginally lower and the S&P ASX 200 has edged up with the region looking for direction following the overnight rally.

The Hang Seng index is taking a breather after Tuesday’s sharp rally and China’s benchmark CSI300 is up 0.3% as Beijing said it can now administer more than 300,000 nucleic acid tests per day compared with 40,000 in March. The fast-track approach comes even as officials said the coronavirus outbreak that began at a wholesale food market in Beijing is under control.

At Wall Street, the Dow Jones Industrial Average rose 0.5%, while the S&P500 gained 0.43%, and the Nasdaq Composite added 0.74%, after data showed the pace of contraction in US manufacturing and services sectors slowed in June. But both services and manufacturing PMIs remained below 50, the level that separates expansion and contraction.

“Let's just be clear – following very big falls in previous months, this is not consistent with a V-shaped recovery. So far, it more resembles an L. If we are lucky, we will get an extended U or even Nike swoosh,” said Robert Carnell, ING Bank’s Regional Head of Research for  Asia-Pacific.

NZ rates unchanged

New Zealand’s decision to keep rates unchanged without expanding its QE programme, was in line with a Bloomberg poll and has not changed analyst expectations the central bank will cut rates into negative territory next year.

“The RBNZ reiterated that negative rates will become an option for the Bank in the future. We think the RBNZ will cut rates by 50 basis points in February and by a further 50 basis points in the months that follow,” Ben Udy, Australia & New Zealand Economist at Capital Economics, said.

Credit markets are also struggling for direction as the Asia IG index was steady at 83/84 but expectations that interest rates will remain low is driving issuers to tap investor hunger for yield.

China Aoyuan announced a bond offering and joins the steady stream of Chinese property developers entering the market following the overnight deals priced by Agile, Ronshine, Sino Ocean and Sichuan Languang. China's property market has benefited from accommodative liquidity and credit conditions and sales volumes have rebounded sharply.

“China's property sector has been resilient. Residential property investment and land sales have rebounded sharply over the last few months, and housing sales have also improved quickly despite rising unemployment. The swift recovery could be attributed to relaxed liquidity and credit conditions as well as eased micro-prudential measures,” said Societe Generale analysts Michelle Lam and Wei Yao, who expect national housing sales volume to drop by only 0.5% in 2020 (or -2% in 2H 2020), compared with 2% growth in 2019.