Trade of the Day: Stocks decline on downbeat economic news; credit outlook improves as central banks flood markets with cash; oil edges higher ahead of key meeting
Quote of the Day: “Unlike previous recessions, usually caused by the interplay of economic and financial imbalances, interest rate hikes, or oil price spikes, the trigger of the present crisis is an exogenous shock,” Joachim Fels, PIMCO Global Economic Advisor in a note which predicts it could be the deepest but also shortest recessions in modern times. “The severity of the COVID-19 health crisis has led governments around the world to lock down populations and aggressively curtail economic and social activity, causing a sharp drop in aggregate output and demand. We are seeing the first-ever recession by government decree – a necessary, temporary, partial shutdown of the economy aimed at preventing an even larger humanitarian crisis.”.
Stock of the day: Semiconductor Manufacturing Intl Corp rose as much as 8.4% after it upgraded its Q1 revenue guidance to 6-8% from 0-2% and gross profit margins to 25-27% from 21-23%
Number of the Day:. 53% – the proportion of companies in Japan’s equity benchmark that are net cash (cash>debt). This compares with 14% for the S&P 500.
Tip of the Day: “With equity markets now close to pricing in our central scenario, we recommend a more selective approach, focusing on oversold or resilient stocks, or long-term winners. Credit markets appear closer to pricing in our downside scenario, and we see US high yield, US investment grade, and USD-denominated emerging market sovereign debt as particularly attractive,” said UBS analysts in a report on Wednesday.
Financial markets remained on the backfoot after the Eurogroup finance ministers’ meeting failed to agree on a co-ordinated package to stimulate the region’s economies. Europe’s two biggest economies produced downbeat growth news with France’s central bank forecasting a 6% gross domestic production contraction in the first quarter, the biggest contraction since the Second World War and Germany’s Ifo Institute said that economic output will shrink by 4.2% this year.
The Stoxx Europe 600 index was down 1.2% and S&P futures are flat.
Earlier, Euro zone finance minister talks for half a trillion euros worth of economic aid to finance recovery from the coronavirus failed to agree on the package. Discussions are suspended until Thursday.
Investors are struggling to arrive at appropriate earnings multiples for stocks due to poor earnings visibility, with companies providing little guidance about 2020.
“In our interaction with management teams, we have sought to understand what measures they have been taking to deal with the crisis and how well-placed they are to ride out the downturn, operationally and financially. For many companies, this year’s earnings are likely to be something of a write-off. Markets will be willing to look through this crisis so long as there is scope for a more “normalised” level of profitability over the medium term,” said Toby Hudson, Head of Asia ex Japan Equities at Schroders.
The infection count of the global pandemic approaching the 1.5 million mark and it has claimed nearly 83,000 lives.
The relentless spread of the coronavirus is of particular concern as epicentres of UK and New York both recorded the highest daily death count.
Korea’s Kospi benchmark fell 0.9%, Hong Kong’s Hang Seng index fell 1.17%, Australia’s S&P ASX 200 dropped 0.86% but the Nikkei 225 rose 2.13% after Japan’s announcement of a roughly $1 trillion stimulus package to address the Covid-19 crisis. Regionally, MSCI Asia Pacific ex-Japan benchmark fell 0.68%.
The Japanese government approved a stimulus worth 108 trillion yen or 19.5% per cent of GDP. The package of measures includes subsidies for firms who retain employees. But analysts saw a minimal impact.
“Nearly ¥70tn will be loans provided by commercial banks and presumably guaranteed by the government. Direct fiscal support is supposed to be a still-huge ¥39tn, but that includes ¥10tn from measures announced in December,” said Capital Economics in a note. “Padding like this is common in Japan’s fiscal announcements.”
Brent futures added 0.3% and WTI crude rose 3.4% ahead of Thursday’s meeting.
Credit markets are also weaker with sovereign CDS wider by 2-5 bps and the Asia IG index Series 33 wider by 3 basis points at 135/140 bps. Australia’s 5-year CDS was an outlier moving in 2 bps to 155/165 bps. Still Shinhan Bank has braved the turbulent markets and is in the market and will price a 5-year FRN later during the day. It follows on the heels of the jumbo multi-tranche sovereign deal from Indonesia.
Indonesia’s recently priced bonds due 2070 fell as much as 2-2/3 points to 93 cents on the dollar, data from MarketAxess showed as investors chased higher rated and cheaper bonds from Qatar which will price later in the day.
