The US Federal Reserve building in Washington, DC.

Economic events

Financial markets are hoping the US Federal Reserve will join the growing queue of central banks that are pledging to rescue markets after the precipitous fall not seen since the Black Monday plunge 33 years ago. Expectations of fiscal support measures are rising in addition to the deep rate cuts by various central banks already baked in bond prices.

China’s central bank on Friday cut reserve requirement ratio (RRR) by 50-100 basis points (bps) unleashing a wall of liquidity. It will release 550 billion yuan into the banking system. This liquidity adds to the 800 billion and 900 billion pile that was released during the last two RRR cuts in January 2020 and September 2019.

It was preceded by the Reserve Bank of Australia’s decision to add A$8.8 billion into short-term bank funding – more than double the usual daily amount and an announcement by the Bank of Korea it could make an emergency rate cut to support the economy.

Norway’s central bank delivered a half-point cut to its main interest rate and Sweden’s central bank is lending more money to its banks to offset the liquidity squeeze.

The collapse in oil prices and fiscal measures have put downward pressure on inflationary expectations, making it a lot easier for central banks to deliver interest rate cuts.

Barclays analysts expect rate cuts in Indonesia, the Philippines and Taiwan at their central bank meetings this week. They also forecast further rate cuts in India, possibly before the next scheduled meeting.

And while markets are expecting a 100-basis point cut at next week’s Federal Reserve meeting, the key issue is credit availability to a limping economy.

“We are sceptical that such deep rate cuts are necessary or sufficient as a policy response, but we doubt that the Fed will risk under-delivering,” said Steve Englander, Standard Chartered strategist in a note.

“We think the Fed will recognise that asset markets will respond positively to policies that help viable companies to survive the economic disruption from the outbreak. This points to an emphasis on ensuring that banks deliver cheap credit to businesses and even households, rather than focusing on the Fed funds and Treasury yields. Massive policy easing without credit measures would probably not restore confidence. Credible credit measures would likely improve the tone of markets, even if policy rate cuts are limited.”

It will take a lot more than rate cuts to rescue markets, with Wall Street remaining in bear territory despite the late rebound on Friday. The Dow Jones Industrial Average jumped 9.36%, the S&P 500 surged 9.29%, and the Nasdaq Composite rebounded 9.35% – but all three benchmarks are still 20% below their February peaks, the definition of a bear market.

“Governments across the (Asia Pacific) region have also displayed greater willingness to take fiscal policy to the frontlines against the Covid-19 outbreak,” wrote Barclays analysts in a note following recent moves by Thailand, Indonesia, Singapore and Malaysia.

Thailand has approved a 400 billion baht stimulus package, Indonesia’s $1.55 billion package would widen its 2020 fiscal deficit to 2.5% of GDP and Singapore has also confirmed that a second fiscal package is in the works, it said.

But unless these are targeted measures, the impact on markets would be temporary because of the nature of the disruption.

“It is difficult to see how policy easing can calm investors’ nerves, with conventional monetary and fiscal tools largely impotent against the negative labor supply shock caused by the virus outbreak,” said Daniel Grosvenor, strategist at Oxford Economics . “Indeed, emergency Fed rate cuts are seldom positive for equities beyond a short-term bounce …Today, we see a significant short-term hit to global growth and the Fed’s move does little to nothing to reduce this economic uncertainty. We believe that targeted policy responses are needed and, until they are delivered on a large scale, equities are likely to remain hostage to newsflow on the virus outbreak.”

Fund flow

Flight to safety continues to drive flows in the second week of March as Money Market Funds attracted over $135 billion, absorbing $25.8 billion flow out of all Bond Funds, $6.3 billion from Balanced Funds, $4.7 billion from Equity Funds and $1.3 billion out of Alternate Funds, according to data from fund tracker EPFR.

The week saw the biggest debt (investment grade, high yield and emerging market) outflow ever, largest cash inflow ever and also the biggest government bond inflow and the largest financial sector outflow of all time, BofA Securities analysts said in a report. “Market volatility has skyrocketed over the past week. Credit vols at record highs, even surpassing GFC levels. The VIX is just shy of the 2008 peak. Risk-off flows take the lead, with record outflows hitting IG, HY, equity, EM debt funds,” BofA Securities analysts said.

The flows are starting to react to stimulus measures after markets lost $16 trillion in market capitalisation in the past three weeks which triggered a $1.5 trillion wave of short-term loan injections from the US Federal Reserve last week.

“Investors are gravitating towards those that have deployed stimulus measures. Both Korea and Taiwan Equity Funds recorded solid inflows during the second week of March,” said EPFR. But India continues to see outflows as investors look past sliding oil prices. “Despite the benefits that lower oil prices confer on India’s economy, investors believe the current government’s focus on Hindu nationalism has left the economy ill-prepared to deal with the economic shocks triggered by the spreading Covid-19 epidemic,” EPFR said.

Companies in focus

The diversified Wanda Group’s rating outlook was changed to negative by Moody’s to reflect “concerns over Wanda Group’s elevated refinancing risk, given its weakened credit profile following the prolonged shutdown of its oil refinery and expected slower demand growth in 2020”. Moody’s expects Wanda Group’s revenue will decline 20% in 2020 before recovering in 2021, reflecting the extended maintenance closure of its refining facility and softer demand for its products amid slowing economic growth in China.

Hong Kong developer Wheelock Properties said over the weekend it had sold 90% of apartments offered for sale in a new project as investors took advantage of falling interest rates and discounts offered in the first new project in two months.  

India’s troubled lender Yes Bank’s rescue package was approved by the government of India which is trying to contain the wider damage in the banking system. Government-owned State Bank of India, the country’s largest bank, will take a 49% stake in Yes Bank, India’s fourth biggest lender. The country’s central bank took control of Yes Bank earlier this month to prevent a run on deposits after a struggle to raise regulatory capital following a rash of bad debts.

Economic data calendar

Last week’s rating changes

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.