A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own.
More than $10 trillion in stimulus – fiscal, monetary and increasingly unorthodox – is being deployed against the crisis, including 150 basis points in Fed rates cuts, repo operations, swaplines and short-term funding to ease strains in money markets. Bob Michele at JPMorgan Asset Management describes it as “the greatest mobilisation of sweeping policy that any of us have ever witnessed.”
But will it be enough? Markets seem uncertain – after Friday’s selloff, we had a shaky start in Asia and now Europe markets are up as are U.S. equity futures.
A frisson of nervousness still runs through markets, however, with euro-dollar volatility climbing back to 10.5% after falling under 10% at the end of last week. The dollar is up 0.5% this morning, having posted its biggest weekly fall last week since 2009. Currency swaps are calmer, but the FRA-OIS spread, a barometer of risk in the interbank market, has widened to 120 basis points. Will that market emerge as a point of stress?
Oil prices reflect demand destruction being wrought by the virus (along with Saudi determination to bring fellow producer Russia to heel) — Brent futures dropped to $23.03, the lowest since November 2002. As a reference point, note that a price of around $45 is needed for even the most efficient oil producer nations to balance their budgets.
Asian shares fell too, with mainland Chinese markets shedding 1.6% even though the PBoC cut the 7-day reverse repo rate to 2.2% from 2.4% — the biggest cut since 2015. The Monetary Authority of Singapore also lowered the midpoint of its currency band and reduced the slope to zero, implying a weaker exchange rate to help support export-driven growth.
The problem is that despite all the best laid plans of mice and men, things have a habit of going wrong. The news on the virus front isn’t great, with a U.S. death toll increasing past 2,000, the global count at over 33,000. It’s even starting to claim the lives of the great and the good, with the CFO of financial firm Jefferies succumbing to it. The virus is now tearing across other markets, including in the developing world, such as Turkey and Argentina.
And it wont be long before investors start counting the potential costs of all these rescue packages. That is likely to spur more talk of adopting yield curve control to accommodate widening budget deficits and give governments more clarity over borrowing costs.
On currency markets, dollar has gained again and the euro’s $1.10 level may be tested to the downside by German preliminary inflation data, which should show a fall. The pound is down 1% – Fitch cut UK ratings and a government expert said she expected some lockdown measures to last six months.
Emerging currencies remain under the cosh – the lira is down 1% and the rand has lost 2% following Moody’s (expected) decision to strip South Africa of its last remaining investment- grade rating. Local bond yields have surged 50 basis points as IG-only funds will soon start beating a retreat; up to $11 billion may flee once the country is ejected from key global bond indexes.
For European equities, there is one certainty: a dividend winter looms. The Bank for International Settlements has called for a global bank dividend ban and UniCredit became the first Italian bank to comply with the European Central Bank call to put dividend and buybacks on hold. It was followed by Dutch lenders ING and ABN AMRO, which will suspend dividend payments until at least October. One exception outside the EU is UBS, which maintained its 2019 dividend.
The pay-out freeze extends far and wide with the Sweden’s SSAB scrapping 2019 dividends, less than a week after the steelmaker halved its original payout proposal.
Meanwhile, headlines scream of mounting corporate losses — Volkswagen Chief Executive Herbert Diess told German TV channel ZDF his company was burning through $2.2 bln a week with production halted by the coronavirus pandemic. Nissan just announced that its global vehicles sales fell by 24.2%. British fashion chain Next has cut off its remaining source of revenue and shut its online business, bowing to pressure from workers worried about their health.
More companies joined in to warn investors about the recession, with ABB saying all of its businesses would suffer in the first quarter.
Other coronavirus-led headlines for European equities include: British accounting firm KPMG’s chairman testing positive for the coronavirus; a new version of a breathing aid has been developed in less a week by a team involving Mercedes Formula One, which is being tested at London hospitals. Sanofi and Regeneron Pharmaceuticals have expanded a clinical trial of their rheumatoid arthritis drug Kevzara as a coronavirus treatment to patients outside the United States.
Emerging-market stocks fell for a second straight day, with the MSCI index down 1.2%. Emerging currencies paint an equally glum picture, with the broader index slipping 0.4%. Aside form the ones already mentioned above, Mexico’s peso – a lightning rod for its exposure to oil and the U.S. economy – fell around 2%.
Fears of capital controls across emerging markets are on investors’ minds — Egypt said it was limiting the amount of money individuals can withdraw from banks after the central bank governor said nearly $2 billion had been withdrawn in the past three weeks. (Editing by Larry King)
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