Covid-19 hammers global markets with PMIs plummeting

Mirroring the emptying of supermarket shelves around the world, indebted corporates have rushed into money markets to hoard dollars, with a global shortage of dollar funding threatening to cripple firms from airlines to retailers.

PMI surveys from Japan showed the services sector shrinking at its fastest pace on record this month and factory activity contracting at its quickest in a decade.

This was consistent with a 4% contraction in the economy in 2020, Capital Economics senior economist Marcel Thieliant said. The likely postponement of the Tokyo Olympics is expected to deal a heavy blow to the world’s third-largest economy.

In Australia, the CBA Services PMI fell to a record low of 39.8 as restaurants, cafés and tourism were hit hard by travel bans and cancellations of events and concerts.

Infinite stimulus

With most asset markets tanking, global central banks have been rolling out extraordinary measures almost daily to stop the rot. On Monday, in its latest drastic step, the US Federal Reserve promised bottomless dollar funding.

For the first time, the Fed will back purchases of corporate bonds, backstop direct loans to companies and will “soon” roll out a programme to get credit to small and medium businesses. It will also expand its asset purchases by “as much as needed”.

Last week, the Fed slashed borrowing costs to zero and took other emergency steps to keep the commercial paper, US treasury debt, and foreign dollar funding markets functional.

But some analysts say infinite monetary policy easing may not be enough and fiscal steps are crucial. The latest US effort on that front remains stalled in the Senate as Democrats said it contained too little money for hospitals and not enough limits on funds for big business.

Finance and monetary leaders from the world’s 20 largest economies (G20) agreed on Monday to develop an “action plan” to respond to the pandemic that the International Monetary Fund (IMF) now expects to trigger a global recession, but offered no specifics.

“For the US economy to be able to come out of the current crisis and the ongoing recession relatively unscathed, more radical policy interventions will be needed in the next few weeks,” Anna Stupnytska, head of global and investment strategy at Fidelity International, said.

Speculation is mounting that data due on Thursday will show US jobless claims rose an eye-watering 1-million last week, with forecasts ranging as high as 4-million.

Goldman Sachs warned that the US economy could contract by an annual rate of 24% in the second quarter, 2.5 times greater than the previous biggest contraction in the period after World War 2.

Reuters