MORNING BID-Fighting the Fed (or trying to)

A look at the day ahead from EMEA deputy markets editor Sujata Rao. The views expressed are her own. “Don’t fight the Fed” is the old adage, but markets seem to be doing their best to do that anyway – another set of Fed measures on Tuesday was meant to reassure markets that the U.S. central bank was there to backstop and provide an adequate supply of dollars. Some of the stresses in the dollar markets have indeed abated and may do so further after this measure, which is mainly aimed at emerging-market central banks, but after the worst quarter for markets in living memory, the second quarter is off to the dismal start.

Let’s take a look at the numbers — more than 851,000 people have been infected by coronavirus across the world and over 42,000 have died. There are also alarming signs that infection rates could start climbing again in Asian nations, where everyone had assumed the worst was over.

Interactive graphic tracking the global virus spread tmsnrt.rs/3aIRuz7

Stimulus measures to counter the effects are also increasing by the day — as mentioned above, the Fed has broadened the ability of dozens of foreign central banks to access U.S. dollars during the coronavirus crisis by allowing them to exchange their holdings of U.S. Treasury securities for overnight dollar loans. On the stimulus front, President Donald Trump has mooted spending 10% of annual GDP on infrastructure projects.

But in a reminder of the gigantic task facing policymakers, dataflow continues to highlight the effects of lockdowns on the world economy, with manufacturing gauges across Asia dropping sharply. Activity in South Korea shrank at its fastest pace in 11 years while Japan’s manufacturing contracted the fastest in a decade. Chinese data improved after hitting a record low in February, reflecting some factory re-openings in March, but can that last, given the rest of the world is in lockdown? And data shows Indian stocks and bonds saw record foreign outflows of $16 billion in March.

The U.S. ISM manufacturing gauge released later in the day is likely to have declined to the low 40s. U.S. economic activity was likely to be “very bad” with unemployment rising above 10%, Cleveland Fed President Loretta Mester was quoted as saying.

All that has soured markets’ mood, taking the dollar index higher again, world stocks down 0.4% on the first day of the month and U.S. futures down 3.5%, European markets are opening weaker, too. Emerging markets, which were meant to the main beneficiaries of the latest Fed measures, see share and currency indexes back in the red. The yen is attempting to rise against the dollar.

There are some positives. Chinese and Australian shares were a rare green spot in Asia’s sea of red. Currency volatility is down and some key measures of dollar funding stress have also eased – clearly dollar supply is not that big a problem. The question is how much was the burst of market upside we saw at the end of last week a bit of end-quarter portfolio rebalancing. We’ll soon find out.

For equity markets (and income funds) a big question is one of dividends. Top UK banks are now scrapping dividends under pressure from regulators to save their capital buffers – that means almost $10 billion in dividends won’t reach shareholders.

That comes after many big euro zone lenders said they would skip dividends – that’s obviously a positive for banks’ capital positions, but given some of this money tends to be reinvested back into shares there could some blowback to market. Next stop – executive bonuses, with Standard Chartered signalling it will be making some cuts. Expect 5% to 10% falls in bank shares.

There are dividend cuts/freeze announcements in other sectors, too, with QinetiQ, Bilfinger and France’s TF1 among others. Adidas shares are also expected to take a hit from the buyback halt. Credit ratings are also having an effect: oil major Total was downgraded to “negative” from “stable”.

In emerging markets, Zambia looks headed for a debt restructuring. Many will recall the rush to buy its debut bond some years ago. But now it has put out a request for proposals to recruit restructuring advisors after years of unsuccessful interaction with the IMF and China to tackle its debt burden. The copper producer has been widely expected to be the next domino to fall in Africa, where many commodity producers with dwindling reserves and limited financial firepower find themselves under enormous pressure.

Zambia’s spreads on the JPMorgan index – the premium asked by investors to hold the debt over U.S. Treasuries – has rocketed to above 4,000. The rule used to be that above 1,000 a country moved into the danger zone, but the whole of the African index has moved to 1,050 now compared with a global composite of 622. Moody’s placed Angola on a review for downgrade.

Editing by Larry King

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