Markets Mar 27

Stimulus rally loses steam

European markets open lower after Asian bourses turn in a lacklustre session

Stimulus rally loses steam

Trade of the Day: Stocks give up gains leading to US open; US Treasuries firm; gold weakens

Quote of the Day: “This was a week of policy action. Policymakers are resolved to fix the credit crunch in both the financial system and the real economy. The question is whether it will work. In our view, it will help but it is too late to prevent a deep recession as can be seen by the surge in initial jobless claims. It also will not be the final move for policymakers. In this piece we review the transmission of policy and offer ways to track, both in markets and the data, whether the stimulus is having an impact,” said BofA Securities analysts in a note.

Stock of the day:   Shandong Dawn Polymer Co rose 5.4% adding to the facemask maker’s gains that first began in mid-January as the demand for its products skyrocketed. The stock price has more than trebled since the latest bull run began.         

Number of the Day:.11 million. China’s diaspora that is being actively discouraged from coming home, according to Bloomberg News. Shaken by the almost 600 “imported” infections it’s caught after it brought its domestic case growth to zero, Beijing has already announced a sealing of its borders to foreigners from Saturday, it said. 

Tip of the Day:  “We are overweight high-quality duration from countries such as Singapore and Korea given investors’ demand for safety assets and expectation of monetary easing. With the expectation that the US dollar is likely to stay strong for some time given risk-averse sentiment and US dollar scarcity, we believe that Asian currencies, such as the Singapore dollar, the Malaysian ringgit, the Thai baht and the New Taiwan dollar, will continue to face depreciation pressure,” said Roy Diao, Head of Asian Fixed Income at Schroders.

European markets have opened lower and Wall Street is also expected to start trading on a weak note as tired investors sell into the recent market strength following a wave of fiscal and monetary stimulus measures. 

The S&P futures are down 1.7% and the Stoxx Europe 600 index down 2.5%.

The Reserve Bank of India became the latest central bank to announce supportive measures, slashing interest rates and injecting a wall of liquidity into Asia’s third biggest economy. But investors were unimpressed with India’s Sensex benchmark fell xx. 

“The RBI has obviously stepped in to fill a void created by the lack of adequate fiscal response. It has compensated for the delayed response by overdelivering and the non-rate measures, particularly, will help soften the blow of the lockdown,” said Priyanka Kishore, analyst at Oxford Economics.

The slew of measures have actually triggered a growth downgrade by some analysts. 

“Considered in conjunction with yesterday’s fiscal package announcement of roughly 0.9% of GDP, today’s steps confirm that both fiscal and monetary tools are being deployed to fight the looming economic downturn. We have downgraded India’s FY21 GDP to 3.8%, the lowest since the global financial crisis (GFC),” said ANZ economists Rini Sen and Sanjay Mathur in a note.

The setback is in contrast with the mood at the start of the day’s trading with Asian markets staying broadly upbeat after record weekly US jobless claims spurred hopes of more stimulus and took Wall Street into bull market territory, with the Dow Jones index up 21% from its Monday lows. A monster stimulus injection commitment from G-20 leaders is also fueling this rally.  The leader summit said in a statement: “We are injecting over $5 trillion into the global economy, as part of targeted fiscal policy, economic measures, and guarantee schemes to counteract the social, economic and financial impacts of the pandemic.” The statement also said the group is “committed to do whatever it takes to overcome the pandemic”.

The pandemic has claimed 24,354 lives globally and the infection count has now exceeded 542,000 globally.

Japan’s Nikkei 225 climbed 3.88%, Korea’s KOSPI added 1.87% and Hang Seng index advanced 0.56%. Australia, fell after surrendering recent gains with the S&P ASX 200 tumbling 5.3%. Regionally, the MSCI Asia Pacific ex-Japan index rose 0.69%. 

Adding to the optimism hopes were comments from Federal Reserve Chairman Jerome Powell, who said in an NBC interview :"When it comes to lending, we are not going to run out of ammunition. That just doesn't happen."

The combination of the US fiscal stimulus and Fed actions has considerably weakened the dollar from its last week’s peak. The dollar index (DXY) is now seen extending its retreat to below 100 as the dollar liquidity eases, DBS analysts said in a note.

“Credit could continue to outperform with the Senate passing a USD2trn stimulus bill yesterday, which includes a $500bn lending program for businesses. This goes a long way in addressing market worries over technical defaults by companies. Increased availability to government loans should diminish risks of refinancing failures in the corporate bond markets,” DBS strategists Philip Wee and Chang Wei Liang said in a note. The Asia IG index is 10bp tighter this morning and was seen at 118/125 bps in early deals.

The strength of the dollar is being closely monitored to guage market sentiment and the extent of the damage to markets. “USD strength is no longer just a symptom of the market crisis; it risks becoming a crisis in and of itself,” said Standard Chartered strategists Steven Englander and Eric Robertson in a note. “For example, significant unhedged USD liabilities have accumulated in emerging markets (EM), and their servicing may be at risk in a weak economic environment. The magnitude and breadth of USD gains suggest that financial markets have become seriously impaired.”