Markets Mar 19

Stimulus, rate cuts fail to placate markets

Oil rebounds but stock markets feeble after data revealed depth of shutdown in China

Stimulus, rate cuts fail to placate markets
Cameramen film stock moves at the Australian Securities Exchange in Sydney. The Reserve Bank made an emergency rate cut to a historic low of 0.25% on Thursday as part of measures to counter the fallout from the Covid-19 epidemic. Photo: Saeed Khan / AFP

(ATF) Trade of the Day: Stock markets dive across the world as virus spread continues; oil rebounds after previous day’s collapse; US Treasuries firm

Quote of the Day: “While the politics support a bigger fiscal response in the US, we should remember that Congress is designed to act more incrementally and more slowly than markets may like. While stimulus is on the horizon – and we should never underestimate Congress’ ability to respond to a crisis, especially if their jobs are on the line – it would be a mistake to think that whatever Congress passes will be a definitive fix for the economy, at least in the short term,” PIMCO economists wrote in a blog.

Stock of the day: Fashion retailer PRADA Holding rose as much as 16.6% after announcing a 24.5% rise in net income on higher revenue.          

Number of the Day: 0.3% – BofA Securities forecast for global growth in 2020. “We now expect Covid-19 to cause a global recession in 2020, of similar magnitude to the recessions of 1982 and 2009. Among the big-three economies, the US and the Euro area will see negative growth, while Chinese growth is expected to come in at a paltry 1.5%,” they said in a note.

Tip of the Day: “For investors with cash to deploy, we would seek out: 1) companies with earnings that are relatively resilient to our virus scenarios, like companies exposed to the 5G rollout in Asia and global quality stocks; 2) secular themes that can benefit from the current situation like fintech, e-commerce, online gaming, and online education; or 3) stocks in cyclical sectors which face risks but we think have been oversold, notably China property stocks listed in Hong Kong, and Japanese automation and machinery companies,” said Mark Haefele, Global Wealth Management Chief Investment Officer at UBS.

Recession fears continued to swirl and central bank moves across the globe failed to placate investors on a day when many stock markets experienced limit-down sessions. The Philippine Stock Exchange resumed trading after suspending business for two days and the index plunged 24% before recouping some losses. Officials at the exchange are now reconsidering its circuit breaker rules.

South Korea’s Kospi fell 8.4% but during the day had dropped as much as 9.5%, triggering a trading halt after hitting the 8% circuit breaker. Indonesia’s stock exchange halted trading for the fourth time this week as the tanking currency sparked widespread selling.

Japan’s Nikkei 225 eased 1.04%, and the Australian benchmark S&P/ASX 200 dropped 3.4%, with the MSCI Asia Pacific ex-Japan index down 4.2%. Hong Kong’s Hang Seng index retreated 2.61% and the China CSI300 index fell 1.3%.

QE in Australia

The Reserve Bank of Australia (RBA) announced a quantitative easing (QE) programme and a rate cut, which failed to placate markets, with stocks continuing to sell-off. The immediate problem, analysts said, lay elsewhere in the system. Banks were hit hard and the dollar was down to an 18-year low – just over 55 US cents.

“Australia was often referred to as the Lucky Country, but the question is how resilient the economy can be under a global sell-off with its banks scrambling to access USD financing,” Natixis chief economist Alicia Garcia Herrero said in a note. “The sharp widening of the USD-AUD cross-currency basis swap shows a big challenge, especially when a quarter of their funding comes from overseas and becomes a structural imbalance of Australia’s financing and the economy.”

Garcia Herrero said it will be important for Australia to reinstate the US dollar swap line the FED opened with the Reserve Bank in 2008 and, if needed, create flexibility in existing liquidity requirements, especially in US dollars.

“If credit markets remain impaired for longer, the RBA may eventually have to purchase private sector securities in addition to government bonds. And there's a decent chance that the Bank will eventually introduce negative interest rates,” Capital Economics said in a research note.

Malaysia cuts SSR, Europe weak

Meanwhile, Bank Negara Malaysia, the Southeast Asian nation's central bank, announced it would reduce the statutory reserve requirement (SRR) ratio by 100bp to 2.00%, and other measures aimed at releasing 30 billion ringgit into the banking system.

Analysts say the SRR cut may foreshadow more policy rate cuts. Barclays analyst Brian Tan says BNM is likely to cut its policy rate by 50bp, to a record low of 2.00%, on May 5, and by another 50bp cut to 1.50% on July 7.

“Such an aggressive easing of monetary policy has become necessary, in our view, as economic activity will likely contract this year. We expect GDP to decline by 1.0% in 2020, compared to 2019’s growth of 4.3%,” he said.

Europe continues to trade weak despite the ECB’s asset purchase programme announced on Wednesday, with the Stoxx Europe 600 down 0.6% and S&P500 futures down 1.3%.

Overnight the European Central Bank announced an asset purchase programme and said it will buy 750 billion euros of private and public sector securities. “Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme,” the central bank said.

“The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year.”

The virus has so far claimed 9,115 lives and infected over 222,600 people globally and it is now widely accepted that the measures to contain the pandemic will result in a global recession.

Analysts are scrambling to downgrade their economic forecasts as the severity of the impact and the momentum of the spread has taken financial markets by surprise.

The shocking economic data released by China, the world’s second largest economy earlier this week, in particular, has triggered the recalibrations.

“We now have early evidence of the negative economic impact on China and it has been far in excess of our initial projections. This, among other factors, including more widespread and draconian containment measures to deal with the spread, the emergence of strain in credit markets, and sharp tightening of financial conditions have caused us to revise down substantially our global growth forecasts in the first half of the year,” Deutsche Bank economists said in a note this morning.

Deutsche Bank now expects a “severe but still relatively brief recession during the first half of 2020”. The bank has revised its world GDP forecast to -12.6% from -2.4% in first quarter of the year before recovering to 3.5% in Q2.

JPMorgan analysts have a more severe view, calling the impact a “huge shock” with two consecutive quarters of contractions and a full year contraction of -1.1%. They said China’s Q2 rebound will be a laboratory for the second half of this year.

“To effectively “bridge the gap” to a 2H20 recovery, policies need to help support aggregate demand for the most vulnerable,” they said in a note. ”At the same time, monetary policy has done what it can in the form of traditional aggregate demand support in cutting rates; asset purchases in size are the likely next step for a number of central banks — some of which is already underway.”

UMESH DESAI

Umesh Desai is Asia Times Finance Editor. Prior to his current role he was at Reuters for 19 years before which he was a credit ratings and equity research analyst. A chartered accountant by training, he is based in Hong Kong. More by Umesh Desai