Asia markets are watchful, awaiting further economic stimulus and the closely watched US jobs data, but the underlying sentiment was positive after the ECB announced a bigger than expected bond-buying program.
In Asia, Japan’s Nikkei 225 index is off 0.35%, while the Korean Kospi index has advanced 0.75% driven by foreign investors’ purchases and Australia’s ASX200 index edged up 0.1%.
Bloomberg news reported that Trump administration officials expect to spend up to $1 trillion in the next round of economic stimulus although any formal announcement will be made only next month.
In China, investors are concerned about liquidity, Nomura analyst Ting Lu said in a note.
“Markets are worried over whether the PBoC is tightening its policy stance or favours direct credit support for small businesses, either of which could lead to less money available for the interbank system and to purchase government bonds,” Lu said after 10-year central government bond (CGB) yields rose from an average of 2.55% in April to 2.77% over 1-3 June.
Reflecting some of the edginess, Hong Kong’s Hang Seng benchmark was up only 0.1% and China’s mainland benchmark CSI300 eased 0.3%.
Overnight, the ECB’s pandemic emergency purchase programme (PEPP) will be increased by €600 billion to a total of €1,350 billion, leading to initial buoyancy.
“The increase in quantitative easing (QE) took markets by surprise, leading to a significant rally,” said Azad Zangana, Senior European Economist and Strategist at Schroders while adding that ECB President Christine Lagarde painted a very negative picture at the press conference that followed.
“Compared to the Schroders growth forecast of -6.1% for 2020 and 4.6% for 2021, the ECB is much more pessimistic for this year and next.”
US jobless could rise to 19%
Later on Friday, the US non-farm payroll will hold centre stage with a Bloomberg survey expecting for the jobless rate to rise to 19.6%, the highest since the Great Depression era of the 1930s, following April’s 14.7%. Payrolls probably declined by almost 8 million after a whopping 20.5 million slump in April, the survey said.
According to a Reuters survey, the unemployment rate rose to 19.8% in May, and non-farm payrolls are expected to drop by 7.4 million.
“A phased re-opening of the economy is underway, and some activities curtailed by social distancing began recovering in mid-April. Still, details in the most recent GDP report suggest the economy is contracting at a 43% annual rate during the second quarter — worse than we previously expected. Accordingly, we revised down our projection of GDP growth for 2020 to -8.8%, below the current consensus. Unemployment claims suggest total job losses topped 30 million by May, pushing the unemployment rate to 19%,” said Joel Prakken, chief US economist and co-head of US economics at IHS Markit.
Financial markets are keeping an eye on the US Federal Reserve whose rate setting meeting is due on June 10, for the first updated “dot plot” since December.
“This is most likely to be the Fed’s “new” tool at the upcoming meeting, in our view. We doubt the Fed will implement or truly open the door to yield curve control. The idea of negative policy rates in the US is akin to a termite infestation. We expect Chairman Powell to continue trying to eradicate it,” Wells Fargo analysts Michael Schumacher, Zachary Griffiths and Erik Nelson said in a note.
Credit markets remain firm with the Asia IG index moving in by 1-1/2bps to 89/91 and sovereign CDS 1-5 bps tighter.
The primary market is expected to remain busy in the days ahead after the recent performance of new issues. Nan Hai Corp, Seazen Group, Zhenro Properties, and PTT Exploration priced their dollar bond offerings overnight. KEPCO’s green bond with a “short to intermediate maturity” of a Reg S/144A dollar bond offering may follow soon.
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