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Asian and European Markets Fall on Fed Bailout Wobble

Asian and European Markets Fall on Fed Bailout Wobble

Published: March 25th, 2020

Asian markets were hit hard this week after efforts to pass a massive stimulus package stalled in the US Congress – even as governments around the world took more drastic measures to restrict movement and stop public gatherings.

India’s Sensex 1 took a steep dive, losing more than 9 per cent; while Singapore’s benchmark plunged 7 per cent after the city-state announced that there had been a sharp increase in infections.

The Hang Seng Index (HSI) in Hong Kong dropped 4.9 per cent, while China's Shanghai Composite (SHCOMP) fell by 3.1 per cent. Markets in South Korea and Australia lost more than 5 per cent.

The US Dollar’s rapid emergence as the haven of choice amidst the outbreak for currency investors is also tilting Asian markets. The Japanese Yen dropped back sharply this week after hitting three year-highs against the dollar earlier in March.

Since its late February peak, the Australian dollar has also fallen against the Greenback by close to 1 per cent. Analysts believe downward pressure is likely to continue over the coming the weeks as the Coronavirus impact blends with data revealing the extent of its effect on Aussie economic output.

The Australian equities market kept tumbling on Tuesday off the back of notable and continuing losses on Wall Street.

The national government in Canberra told gyms, pubs, restaurants and cinemas to close on Monday. Several Australian states are set to add their own list of required closures to the list, with only essential services allowed to stay open.

Stocks in Australia’s big four banks also fell in value. Commonwealth Bank lost more than 9 per cent. ANZ Banking dropped 10 per cent. Westpac took an 11 per cent hit, while National Australia Bank plunged by nearly 12 per cent.

Olympics delay, or cancellation?

Japan's Nikkei index held steady through Monday’s rout, gaining close to two per cent on speculation (since confirmed) that the International Olympic Committee would postpone, rather than cancel, this Summer’s Games in Tokyo.

In the US, meanwhile, markets reacted to tense negotiations between the White House and the Democratic Party in Congress continued after the Senate voted against a $2 trillion economic rescue package.

Progress on the colossal stimulus package stalled over the weekend, creating uncertainty over when or if lawmakers will reach a deal.

Senate Democrats said the package was weighted too much toward industry bailouts and not enough toward new emergency protections for workers. Democratic Speaker Nancy Pelosi said that the House of Representatives would introduce its own rescue bill while negotiations continue in the Senate.

After the weekend’s political wrangling, markets reopened to a business landscape characterised by closures and lockdowns intended to stop the COVID-19 outbreak, and news that the global number of people infected had surged past 335,000.

The S&P 500 was down 3.9 per cent on the news. The Dow YM00 also dropped 3.9 per cent.

A steady stream of bad news

As the world’s largest economy, even regional events in the US can have an impact far beyond America’s shires. Oil prices sank again as New York became the latest US state to tell workers to stay home to limit the spread of infection. California and several other states also imposed new limits on movement and commercial activity.

The steady stream of global shutdowns and restrictions on travel, transport, and movement mean oil consumption is down, and demand is dropping fast. US crude fell again by more than 20 per cent to fall below $20 per barrel for the first time since 2002.

The International Monetary Fund provided more reason for worry. On Monday, managing director Kristalina Georgieva announced that the IMF is planning for a recession this year, and expecting it to be as bad as the downturn experienced during the global financial crisis of 2008/2009 ‘or worse’.

Morgan Stanley analysts echoed the grim assessment with a forecast of the damage coronavirus could inflict on the American economy over the coming months.

A research note published this week says the bank believes the economy will shrink at an annualised rate of 2.4 per cent in Q1, and suffer a 30 per cent drop in Q2. If that occurs, it will be the worst one-quarter contraction in modern American history.

Under Morgan Stanley’s bleak scenario, US unemployment would hit 13 per cent, another terrible record.

Europe feels it too

In Europe on Monday, the FTSE 100 was down 2.7 per cent while France's CAC 40 and Germany's DAX (DAX) dropped by just under 2 per cent.

PMI data released on Tuesday by IHS Markit revealed that the eurozone economy had taken a massive beating in March thanks to the COVID-19 outbreak and its toll on commercial activity.

The provisional or ‘flash’ survey data showed a collapse to 31.4 in March from the previous month’s 51.6. The data captured business activity in manufacturing and services across the 19-country economic bloc.

Those numbers mark the biggest one-month fall in business activity since comparable data were first collected.

Tuesday’s numbers represented a significant negative surprise for currency traders and fell below all forecasts in a Reuters poll where the media prediction was 38.8. In PMI data, the 50-point mark is where the line is drawn between economic expansion and economic contraction.

While IHS Markit captured modest growth in January and February, it was only in March that government action to contain the spread of the coronavirus outbreak began to bite. Across Europe, the travel and retail sectors were told to effectively shut their doors to the public.

In the service sector business activity dropped to just over 28 points from 52 in February.

Closing note

New measures to combat the virus have been imposed in Australia, New Zealand and India. The United Kingdom belatedly decided to close pubs and restaurants on Tuesday and to set new restrictions on movement.